How To Control Business Costs As You Grow

What Is Business Cost Control?

Business cost control is the discipline of making sure every pound you spend earns its place, and that your costs grow more slowly than your sales. It is different from cost cutting, which is a one-off reaction to pressure. In most owner-managed businesses the problem is rarely one large overspend. It is a steady build up of small costs that nobody has questioned since they were agreed.

Business cost control is the ongoing process of understanding what each cost buys, who is responsible for it and whether it still delivers value. Cost cutting reduces spend once, often at the expense of quality or morale. Cost control builds habits that keep spend in proportion to the business, so you never need an emergency exercise.

The aim is not the lowest possible cost base. It is a cost base that protects your gross profit, supports your cashflow and leaves room to invest where it matters.

Why Do Costs Rise Faster Than Sales As A Business Grows?

Costs rise faster than sales because each decision looks sensible when it is made and nobody reviews the total. A software subscription is added for one project and never cancelled. A contract rolls over on the same terms for the third year. A new hire arrives ahead of the work that justified them. Meanwhile the owner is busy running the business, and nobody is comparing what was planned with what was spent.

This is one of the most consistent patterns we see. Without regular management information, cost growth is invisible until it shows up as squeezed profit or a tight bank balance.

How Do You Find Where Money Is Being Wasted?

You find waste by looking at your costs line by line over time, rather than reading the profit and loss account as a single total. Export at least 12 months of costs from your accounting system, ideally 24, and work through them in this order:

• Express every cost line as a percentage of turnover, so you can see which are growing faster than sales
• List your ten largest overhead lines and the contract terms and renewal dates behind each
• Check the categories where waste hides most often: premises, IT and software, marketing, insurance, bank and finance charges, professional fees and vehicles
• Ask three questions of each line: do we still need this, are we using all of it, and when did we last compare the price?

Most reviews of this kind find costs the business is paying for but no longer uses. They rarely find one dramatic saving. They find a dozen modest ones that add up.

How Should You Approach Direct Costs And Overheads Differently?

Direct costs and overheads behave differently, so they need different questions. Direct costs move with activity, while overheads tend to stay fixed until the business takes a step up in size.

Direct costs

Direct costs are the ingredients of what you sell, so controlling them protects your gross margin. There are two routes, and you should use both. The first is price: renegotiate with suppliers, buy in more cost-effective volumes, or invite competing quotes. The second is efficiency: reduce rework, poor scheduling, manual processes and wasted materials. If you want to see what a margin improvement is worth, the Gross Profit Margin Calculator shows the effect of changes to price, volume and cost. Where the waste sits in how work gets done, our guide to improving operational efficiency is the place to start.

Cost control is only half of the margin picture. If your prices have not kept pace with your costs, read how SMEs improve gross margin through pricing as well.

Overhead costs

Overheads should grow more slowly than turnover. If sales rise 20% and overheads rise 20%, you have gained nothing from scale. Review each overhead on a fixed cycle, usually annually, and treat every renewal as a decision rather than an administrative task. Be especially careful with step costs such as new premises, a new system or a new management layer. Each one is a long term commitment that should be justified by a forecast, not by a good month.

People costs

For most businesses, people are the largest cost and the largest source of value. The useful question is rarely how many people you employ. It is whether the capacity you are paying for is being used on work that earns a return. If roles genuinely cannot be justified, take professional advice before making redundancies so you act lawfully and fairly.

How Do You Keep Costs Under Control After A Review?

You keep costs under control by building a few simple routines, because a one-off review fades within a year. The routines that work in practice are:

• A budget that is built from the review and compared with actual results every month
• A named owner for every significant cost line, who answers for it
• Approval thresholds, so spend above an agreed amount needs a second signature
• A renewals diary, so contracts are reviewed before they roll over
• One or two key performance indicators on costs, such as overheads as a percentage of turnover and gross margin by product or service

Well designed management accounts make this routine easy, because the comparison against budget is produced for you each month.

Is The Cheapest Option Always The Best Value?

The cheapest option is often not the best value, because price is only one part of what you pay for. Quality, reliability, delivery terms, warranty and the cost of switching all affect the true cost. The same applies to people: losing an experienced team member, or failing to hire well because the offer was uncompetitive, usually costs more than the saving. Judge each significant cost on value for money, not price alone.

When Should You Get Independent Help With Cost Control?

Independent help is worth considering when profit is falling despite rising sales, when nobody has reviewed overheads in the last twelve months, or when your bank is asking questions you cannot answer with confidence. An outside view is more objective, because someone who did not agree the contracts finds it easier to question them.

A Fractional Finance Director can lead a cost review, set up the budgeting and reporting that keep costs in check and report to you on the results, usually for a day or two a month. Where the immediate need is better monthly reporting, a Part-Time Management Accountant can build it. If you want an independent view across the whole business first, our Strategic Business Review looks at costs alongside the other areas that shape profit.

Frequently Asked Questions

What is the difference between cost control and cost cutting?

Cost cutting is a one-off reduction in spend, usually made under pressure. Cost control is the ongoing management of spend so that it stays in proportion to the business. Cost control tends to protect quality and growth, while cost cutting often damages them.

How often should a business review its costs?

Review costs monthly against budget and carry out a full line by line review at least once a year. Contracts and subscriptions should also be reviewed ahead of each renewal date, so you have time to compare alternatives.

What is a good level of overheads for an SME?

There is no single figure, because it varies by sector and business model. A better test is the trend: overheads as a percentage of turnover should be stable or falling as you grow, and they should always be comfortably covered by your gross margin.

Can cost control harm growth?

It can if it is applied as blanket cuts, which often remove marketing, training or capacity that the business needs. Done well, cost control frees up cash and margin to fund growth, because the money goes to the spending that earns a return.

If you would like an experienced, independent view of your costs and margins, book a free business review and we will talk it through.