How Cost Control Boosts Profits: Techniques, Examples, & Tools

Getting a grip on your costs is crucial to creating a solid financial foundation for your business and boosting those profits. If you know some nifty cost control tricks, you’ll be better equipped to stick to your project budgets and squeeze more profit out of each one.

So, what’s the real deal about cost control, why should you do it, and what effective methods can you use to keep those pesky expenses in check? Let’s dive in and sort it out.

Insights into Cost Control 

Cost control simply means identifying and reducing business expenditures to enhance your profits, and it begins with the budgeting process. Here’s how you do it: you compare what you eventually spend with your planned budget. If you’ve splashed out more than you planned, that’s your cue to step in and fix things.

Take this, for example. Say you’re after a particular product or service. Why not look around and get quotes from different suppliers? You might just bag yourself a better deal and save costs.

However, cost control is not just about penny-pinching. It’s crucial if you want to keep your business in the black and see it grow.

Let’s talk about payroll for a second; Loads of companies outsource it these days. Why? Well, tax laws are always changing, and every time an employee comes or goes, you need to update records. However, if you get a payroll company in, they’ll sort out everyone’s wages and taxes. It saves you time and money in the long run.

Benefits of Efficient Cost Control

But why should you focus on cost control? Here are some advantages that come with it:

• Budgets help keep projects on track: Setting a budget gives your team a clear plan to follow. It shows when the project should be finished, which can motivate everyone to work efficiently. This helps keep the project moving along smoothly.
• Maintains good profits: By managing costs, you make sure projects bring in more money than what’s invested in them. This flow keeps profits healthy and improves the company’s financial situation. It’s a smart way to keep the business strong.
• Prevents costs from increasing too much: Cost control helps keep project expenses in check. If the team finds they need more money, they can talk to the finance department. This way, costs don’t grow unexpectedly as the project goes on.

Components of Successful Cost Control

So, how do you make a successful attempt to achieve and monitor a project’s cost control? Well, consider these key factors: 

• Wage costs

Cost labour is about how much you pay your workers. Add in all the extras like benefits and taxes. When you’re planning a project, think about how many people you’ll need and for how long. This helps you get a good idea of the total cost.

• Materials and equipment

The cost of materials covers all the equipment and supplies you need to buy for the project. It’s not just what you need at the start – think about what you might need to get during the project and at the end as well.

• The real cost

The actual cost is the total amount you exert on a project from start to finish. It includes wages, materials, and any other expenses that pop up along the way.

• Cost variance

You get the cost differences after comparing what your budget was and how much you eventually spent in implementing the whole project. For example, if you planned to spend 20 lakhs but ended up spending 25 lakhs, the cost of variance then is 5 lakhs. It’s good to keep an eye on overspending.

• Profit from your investment

The ROI looks at how much profit the project brought in compared to what you invested in it. If you made more money than you spent, that’s a good sign. It means your investment was worthwhile.

5 Techniques to Control Costs

Now, let’s look at five ways you can keep an eye on your business expenditure:

• Plan your budget carefully: Before starting a new project, it’s important to sit down and work out how much it’ll cost because budgeting helps estimate expenses, organise finances, and ensure that the cost variance is relatively low. Think about everything – how many people you’ll need, how long it’ll take, and what materials you’ll use. Always leave a bit extra in the budget for surprises, as sometimes things take longer, or you need more stuff than you thought.
• Keep checking your spending: It’s a good idea to look at your expenses regularly. Set up checkpoints – maybe weekly or monthly – to see if you’re sticking to the budget. If the team needs more time or materials, you can spot it early and make changes without breaking the bank.
• Have a system for big changes: Sometimes, big changes happen that can affect your budget. Maybe there’s a problem or a big delay. Use a system to track these changes, make sure they’re needed, and adjust your budget accordingly. 
• Manage your time well: Time is money, as they say. If a project runs over its deadline, you’ll end up spending more on wages and materials. Good time management helps keep costs down and keeps the project profitable.
• Track the value you’re getting: This is a clever trick accountants use. They look at how much of the project is complete and compare it to the budget. It helps predict how the project will turn out financially. It’s a good way to see if you’re on track or if you need to make some changes.

Approaches to Managing Expenses

There are many cost control strategies that you can implement to manage or reduce your expenses:

• Managing stock

Looking after your stock means having the right amount of products on hand, preventing understocking and overstocking while keeping optimal inventory. It helps save money on storage, makes sure you don’t waste it on paying additional warehousing costs for obsolete products, and optimises your cash flow.

• Working well with suppliers

Building beneficial and strong relationships with your suppliers can help you agree on better prices and terms. It’s also about choosing suppliers who are reliable and offer good value. Good communication helps everyone work together better and save money.

• Optimising your processes

Process optimisation is about finding more innovative ways to do things, like eliminating inefficiencies and alleviating your costs. It means improvising your workflows, identifying bottlenecks to fix problems, and automating repetitive tasks. The goal is to get more done with less waste.

• Waste reduction

Cutting down on waste requires using resources wisely and not throwing things away if you don’t have to, i.e. maximising your resource utilisation. It includes recycling, making products with less waste, and finding ways to be sustainable and eco-conscious.

• Clever pricing

It’s about setting the right prices for what you sell, thinking about what customers will pay, how much things cost to make, and what other companies charge. Such competitive pricing gives you an edge and a good profit while keeping customers happy.

The pricing strategies that you can use here can include cost-plus pricing, value-based pricing, or dynamic pricing. 

Applying Variance Analysis for Cost Control

When we talk about a ‘variance’, we’re looking at the difference between the budget and the actual costs. It’s a useful tool for managers to spot areas that might need a bit of attention.

It’s a good idea for a company to check these differences every month for all the money coming in and going out. Usually, they’ll focus on the biggest differences first, as these are likely to have the most impact on how the company’s doing overall.

Let’s say, for example, a furniture company finds they’ve spent ₹3,75,000 more on materials than they planned. That’s quite a big unfavourable variance! They might want to look around for other suppliers who can offer better prices. This could help them avoid overspending in the future.

Some businesses do things slightly differently. They look at which costs that have the largest variance from the decided budget, percentage-wise, rather than just focusing on the biggest amounts.

Either way, the goal is the same – to maintain a smooth cash flow and have your business running smoothly.

Cost Control within Cost Management Framework

Project management expenses require proper attention and monitoring in the project activities phase before completion. You must use specialised project management software and metrics to estimate cost baseline by task, control, and minimise project costs in a cost control system. You can turn your future projects into more efficient ones after analysing them.

Steps to Achieve Efficient Cost Management

The four main steps to keep your costs in check are:

• Getting set up

First up, you need to decide what’s going on in your cost plan. Who needs to be involved? What tools will you use to keep track of spending? How will you organise all the numbers? Sorting this out early makes everything easier later on.

• Planning your resources

In this step, you must figure out everything you’ll need for your project, which could be anything from materials and information to people and cloud computing resources. Work out how much of each thing you need and for how long. 

• Working out the budget

Now, you need to put some numbers on paper. As you get clearer on what the project involves, you can be more specific about costs. So, project managers must look at similar projects completed before, which can give some deep insights.

There are two ways to approach this. In the top-down approach, the upper management or bosses in an organisation work out how long things should take and how much they should cost. In a bottom-up approach, each team estimates the allocated budget  and duration of their individual tasks. Management uses this information to figure out the project’s estimated budget and duration. Both ways can work well, depending on your situation.

• Keeping cost control

Now that you’re up and running, keep a close eye on what you’re spending. Compare it to what you planned to spend by analysing data from different project teams. If costs exceed your budget, the managers might need to make some changes to adjust cost overruns, reduce deviations from the budget, and cap the budget when needed.

It’s really important to have good, up-to-date information about your costs with accurate cost reporting for effective cost management. You’ll need to use data visualisation to fetch real-time cost data and insight to spot any problems quickly. You must measure the variances from budgeted costs and take corrective measures immediately.

Cost Management Techniques in Projects

Let us acquaint you with some effective cost control methods:

• Cutting costs

Cost control involves finding ways to spend less without compromising the quality of your product or service. You might get better deals from suppliers, make your work processes smoother, or use strategies to improve efficiency.

• Keeping track of costs

You must carefully watch how much it costs to make your products or provide your services. It helps you understand where your money’s going, set fair prices, and decide how to use your resources.

• Making a budget

A budget is like a financial plan for your business. It shows how much money you expect to make and spend over a specific time. It helps you set limits on spending and spot when you’re going over budget.

• Standard cost planning

This method involves setting expected costs for materials, work, and other expenses. You then compare these with what you actually spend. It shows you if you’re spending more or less than you should be.

• Earned value management

This method helps you keep track of how much project work you’ve accomplished compared to how much you’ve spent and how long it’s taken. It’s useful for making sure projects stay on budget and on time.

• Analysing differences

This method is all about understanding why your actual costs might be different from your planned budget. It helps you spot things like changes in prices or areas where you’re not working as efficiently as you could be.

• Sticking to the budget

It means regularly checking your spending against your budget. You keep a regular check on what you’re shelling out and make changes if you’re overspending or exceeding your budget.

• Outsourcing

Sometimes, it’s cheaper to get someone outside your business to do certain jobs. This can help you save money on things like equipment or training.

• Continual improvement process (CIP)

In this method, you always look for ways to bring continuous enhancements in cost control. You set goals to improve, make changes, and then see if those changes are helping you save money.

Approaches to Cost Estimation

Cost estimation is a vital step in managing costs. So, here are some techniques that can help you get accurate estimates since budgeting for complex workflows can be challenging.

• Factor estimation

When projects start, businesses often don’t know everything about them. They might not be sure about all the details or features. Instead of wasting time on a detailed budget that might change, you can use factor estimation. It’s a quick way to get a general idea of costs. For example, in manufacturing, there’s a rule that says if you double the size of a factory, costs usually go up by about 60%.

• Parametric estimation

Looking at past projects helps predict new costs. You can study old contracts and see how materials and labour costs were related, which means analysing previous contract prices, values, and relationships between labour and materials in previous works.

For instance, you might notice that thicker metal sheets in engineering projects always cost more. You can use this information when planning similar new projects.

• Quantitative factor

As work goes on, you learn more about the project. You, then, use this new information to make your earlier estimates more accurate. It’s like updating the first guess with real data you get as you work on the project.

• Resource-based estimation

Sometimes, it’s important to factor in time, especially when dealing with a sensitive asset. In this method, you estimate how long each leg of the project will take and put it on a calendar. Keeping track of time can be just as important as watching the costs.

• Unit-rate

This is a simple but useful method. You look at the cost of one small part and use it to guess the total cost. For example, if one pipe costs ₹1,200 and takes an hour to install, and we need 20 pipes, we might estimate ₹24,000 and 20 hours of work. It’s not always perfect (installing many pipes might be quicker), but it’s a helpful starting point.

Cost Management Control Techniques

Here’s a list of cost control methods that you can use to manage all that spending:

Target net income 

Target net income refers to the expected business profits after calculating taxes for an accounting period. It determines an optimal level of expenses in a budget to give a project or business its desired income level.    

You can utilise this method in a break-even analysis formula to find out the number of units you require to meet that target net income rather than adopting the zero break-even amount approach. You get the contribution margin as you deduct the variable costs from sales (sales – variable costs). 

Target net income (TNI) formula:

Target net income = sales – variable expenses – fixed costs

where,

TNI = (units x sales price) – (units x variable expenses) – fixed costs

These formulas are quite handy. You can use them in two ways:

If you know how much profit you want to make, you can work out how many items you need to sell or how much money you need to bring in.

Or, if you have a fair idea of your sales and costs, you can figure out how much profit you’re likely to make.

• Variance analysis

Variance analysis is perfect for comparing budget and actual costs for a time period or project. You have unfavourable variances piling up when actual costs exceed your decided budget. The favourable ones are where the actual costs stay below the budget, showing better actual results than you expected. 

Many factories use a special type of accounting that sets ‘standard’ costs for things like workers, materials, and running the factory. It helps them see when actual costs are different from what they expected.

Every month, and at the end of the year or a project, the financial analysts take a closer look at any big differences where they’ve spent more than planned. They try to figure out why this happened and how to spend less in the future.

• Earned value management 

Think of EVM as a project health check-up that happens while the project is still running. Here’s how it works:

• It looks at both the schedule and the costs as you go along.
• It compares what you thought you’d spend by now with what you’ve actually spent.
• This helps you see if you’re on track or if things are getting out of hand.
• The beauty of EVM is that it lets you detect issues early. If costs are increasing, managers can step in and trim expenses. This usually leads to better results overall.
• In extreme cases, if EVM shows that costs are way off track and cancellation is feasible, a business might decide to pull the plug on a project that’s headed for a financial disaster.

Real-World Examples of Cost Control

Here are some examples of cost control in different industries:

• Manufacturing industry

In manufacturing, cost control zeroes in on optimising production processes, minimising material waste, and enhancing operational efficiency. Firms in this industry apply techniques such as just-in-time inventory management, lean manufacturing, and automation to streamline their operations and curtail costs without deteriorating product/service quality.

• Healthcare 

Cost control is an extremely crucial part of the healthcare industry, as medical expenses are on the rise in the healthcare sector. This sector’s cost control process involves strategies like employing cost-effective healthcare technologies, optimising resource allocation, and negotiating contracts and better rates with suppliers and service providers.

• Retail 

In the retail sector, shops focus on keeping the right amount of stock and optimising their supply chain. They use techniques such as efficient inventory systems, shrinkage monitoring, bargaining with vendors for favourable pricing, and cost-effective marketing strategies to achieve these goals.

Obstacles in Cost Control

You may face some difficulties in controlling costs, which can include:

• Mixing up cost analysis with accounting
• Ensuring budget calculations and predictions are consistent
• Combining financial data from different sources
• Aligning project schedules with financial periods
• Adapting to changes in the project
• Managing the cost of the cost control process itself

Software Solutions for Cost Control

There’s a bunch of cost control software out there to help businesses keep tabs on their spending. Let’s break it down:

• Core ERP and accounting software

Enterprise resource planning (ERP) and accounting systems come with essential cost-control variance features, like built-in actual vs. budget comparisons for in-depth financial statements by account, along with drill-down to underlying data. 

Moreover, you can implement standard vs actual costing inefficient and well-equipped ERP systems for manufacturing firms. These standard costing variances include labour hours and pricing, the purchase price for materials, material usage, and overhead spending usage variances caused by production volume or machine hours changes.

• Smart shop floor modules

The cost control software has specialised features inside the ERP systems to create a smart shop floor application that uses machine learning, IoT sensors (Internet of Things), and AI (artificial intelligence) software. 

These are the watchdogs of the factory floor. They initiate real-time alerts to trigger exceptions when manufacturing processes deviate from standards. The sooner you get an, the less scrap and rework cost you’d bear. 

• Financial forecasting and budgeting software

Advanced forecasting and budgeting software comes in two forms: it’s either a software module of a bigger ERP system or a separate tool you can buy on its own. It helps you generate more accurate sales forecasts and expense budgets for cost control variance analysis. 

• AP automation software

You can integrate this Accounts payable (AP) automation software easily with ERP and accounting systems to optimise and minimise the payables and the workload for global mass payments by up to  80%, reducing your future labour costs for new recruitment. 

• Project management software

Project management software consists of project costing, project schedule estimation, resource projection, costing and budgeting, variance analysis, and Gannt charts. The software can help you do a post-project evaluation of actual costs that shows you total cost vs. budget and benchmarks with similar projects and rivals. 

Conclusion

Cost control is vital for business success. It’s about smart spending, not just cutting corners. By setting budgets, analysing expenses, and using modern software, you can manage your company’s finances more effectively. This careful oversight helps you spot issues early, make informed decisions, and ultimately boost profits. Good cost control isn’t just a short-term tactic—it’s a strategy for long-term financial health and growth.