Cost-cutting and cost-containment tactics and techniques are common to any business. Companies routinely look for ways to save money in various areas or simply reduce budgets by a percentage amount, requiring employees to make the tighter financial parameters work.
While it’s often used interchangeably with those two terms, “cost management” is another matter entirely, says Edward Blocher, professor of accounting at the University of North Carolina’s Kenan-Flagler Business School in Chapel Hill, North Carolina. Cost management is a strategic approach to controlling costs by examining the benefit of the expenditures and finding ways to gain the highest levels of efficiency and effectiveness in each area of business. Its form varies depending on the type of business, says Blocher. For an electronics manufacturer faced with demanding customers who also want highly competitive price points, cost management might require a program of process improvement to boost productivity and eliminate waste. Approaches such as total quality management and Lean Six Sigma are common in this type of business.
In other types, cost management might include target costing, where the organization delivers a product or service within a particular cost per unit or per project. In such cases, the company evaluates the features of the product or service and eliminates those which are unimportant to the customer in favor of investing more in the features that are valued while remaining within the defined cost structure. “It’s an approach that was developed by Toyota and is now widely used,” says Blocher.
Derrick J. Rebello, CPA, director of accounting and auditing services at Westwood, Mass.-based accounting and business advisory firm Gray, Gray and Gray, LLP, urges his clients to take a long-term look at their expenditures and incorporate strategic approaches to reduce them. While it sounds counter-intuitive, this may require spending more money upfront. For example, examining core business functions and streamlining those operations in-house while outsourcing peripheral business functions can be an effective cost-management strategy. A company may invest in a call center to better manage in-bound sales and customer service calls, but outsource marketing and use a cloud-based communications platform to significantly reduce its information technology staffing and equipment needs, reducing costs significantly over time.
Staffing is another area where cost management can yield significant savings. Making changes to staffing levels according to work flow instead of staffing equally at all times can reduce or eliminate backlogs and improve efficiency. Developing additional skills through cross-training can also be an effective way to manage staffing costs, says Rebello.
“Some of my clients are just embracing the attrition—employees moving or leaving—and getting their employees to do more with less, but letting them be in charge of it and be able to drive it,” he says. By developing more skills in your employees and training them to do different jobs, you may find that job descriptions change and you can get more done with fewer people on the payroll, he says.
If you’re having trouble thinking strategically about how your costs can be managed, it might be a good idea to get counsel from a trusted financial advisor who can give you an objective analysis and ideas, says Rebello. Sometimes, adopting new strategic initiatives requires new ways of thinking or outside ideas, he says.