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Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. A business owner compares the company's actual financial results with the budgeted expectations, and if actual costs are higher than planned, management has the information it needs to take action.
As an example, a company can obtain bids from different vendors that provide the same product or service, which can lower costs. Cost control is an important factor in maintaining and growing profitability.
Corporate payroll, for example, is often outsourced, because payroll tax laws change constantly, and employee turnover requires frequent changes to payroll records. A payroll company can calculate the net pay and tax withholdings for each worker, which saves the employer time and expense.
- Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process.
- Cost control is an important factor in maintaining and growing profitability.
- Outsourcing is a common method to control costs because many businesses find it cheaper to pay a third party to perform a task than to take on the work within the company.
Controlling costs is one way to plan for a target net income, which is computed using the following formula:
Sales - fixed costs - variable costs = target net income
Assume, for example, that a retail clothing shop wants to earn $10,000 in net income from $100,000 in sales for the month. To reach the goal, management reviews both fixed and variable costs and attempts to reduce the expenses. Inventory is a variable cost that can be reduced by finding other suppliers that may offer more competitive prices.
It may take longer to reduce fixed costs, such as a lease payment, because these costs are usually fixed in a contract. Reaching a target net income is particularly important for a public company, since investors purchase the issuer’s common stock based on the expectation of earnings growth over time.
Outsourcing is used frequently to control costs because many businesses find it cheaper to pay a third party to perform a task than to take on the work within the company.
A variance is defined as the difference between budgeted and actual results. Managers use variance analysis as a tool to identify critical areas that may need change. Every month, a company should perform variance analysis on each revenue and expense account. Management can address the largest dollar amount variances first, since those accounts are most likely to have the biggest impact on company results.
If, for example, a toy manufacturer has a $50,000 unfavorable variance in the material expense account, the firm should consider obtaining bids from other material suppliers to lower costs and eliminate the variance moving forward. Some businesses analyze variances and take action on the actual costs that have the largest percentage difference from budgeted costs.
In a competitive marketplace, the low-cost producers are the ones that can earn the highest profits. Reducing costs is therefore a key objective for most businesses since it increases both efficiency and profitability.
In general, business costs can be categorized as fixed vs. variable and direct vs. indirect.
- Fixed costs are those that do not change, such as rent or insurance payments.
- Variable costs will change with productivity such as wage labor or energy usage.
- Direct costs are those involved with production or operations, such as costs of raw materials.
- Indirect costs include things like overhead, which are not directly related to the business's core operations.
Cost controls are often associated with increasing the operating efficiency of a business; however, individuals and households can also benefit from such strategies to increase savings and cash flows. Establishing and sticking to a budget is one key strategy. Shopping around and comparing competitors' prices is another way to keep prices down. Look to shop when items are on sale and consider second-hand goods if possible.
Performance management is a corporate management tool that helps managers monitor and evaluate employees' work. Performance management's goal is to create an environment where people can perform to the best of their abilities and produce the highest-quality work most efficiently and effectively.
- Performance management tools help people to perform to the best of their abilities and produce the highest-quality work most efficiently and effectively.
- The precept of performance management is to view individuals in the context of the broader workplace system.
- Performance management focuses on accountability and transparency and fosters a clear understanding of expectations.
A formal performance-management program helps managers and employees see eye-to-eye about expectations, goals, and career progress, including how an individual's work aligns with the company's overall vision. Generally speaking, performance management views individuals in the context of the broader workplace system. In theory, you seek the absolute performance standard, though that is considered unattainable.
Performance-management programs use traditional tools such as creating and measuring goals, objectives, and milestones. They also aim to define what effective performance looks like and develop processes to measure performance. However, instead of using the traditional paradigm of year-end reviews, performance management turns every interaction with an employee into an occasion to learn.
Managers can use performance management tools to adjust workflow, recommend new courses of action, and make other decisions that will help employees achieve their objectives. In turn, this helps the company reach its goals and perform optimally. For example, the manager of a sales department gives staff target revenue volumes that they must reach within a set period. In a performance management system, along with the numbers, the manager would offer guidance gauged to help the salespeople succeed.
Focusing on continuous accountability creates a healthier, more transparent work environment, and emphasis on regular meetings can improve overall communications. Because performance management establishes concrete rules, everyone has a clearer understanding of the expectations. When expectations are clear, the workplace is less stressful. Employees are not trying to impress a manager by doing some random task, and managers aren't worried about how to tell employees that they are not performing well. If the system is working, they probably know it already.
Although performance-management software packages exist, templates are generally customized for a specific company. Effective performance-management programs, however, contain certain universal elements, such as:
- Aligning employees' activities with the company's mission and goals. Employees should understand how their goals contribute to the company's overall achievements.
- Developing specific job-performance outcomes. What goods or services does my job produce? What effect should my work have on the company? How should I interact with clients, colleagues, and supervisors? What procedures does my job entail?
- Creating measurable performance-based expectations. Employees should give input into how success is measured. Expectations include results—the goods and services an employee produces; actions—the processes an employee uses to make a product or perform a service; and behaviors—the demeanor and values an employee demonstrates at work.
- Defining job-development plans. Supervisors and employees together should define a job's duties. Employees should have a say in what types of new things they learn and how they can use their knowledge to the company's benefit.
- Meeting regularly. Instead of waiting for an annual appraisal, managers and employees should engage actively year-round to evaluate progress.