Cost Controls

Successful organizations develop a system of cost controls that fit their organization size and type. Cost controls are necessary for every organization, especially businesses that must survive in an ever changing competitive world.

Impact of Cost Control

Saving $1 has more impact than increasing revenues $1. In a businesss each dollar of revenue only brings in a small pecentage of profit, whereas each dollar saved goes 100% to the bottom line. In a nonprofit organization new revenues, grants or donations are difficult to obtain and may require expenditures of substantial organizational resources versus reducing costs which become 100% available to the organization.

Cash Flow Crises

Small and new organizations that are growing many times have cycles of cash flow crisis. These can be caused by a narrow focus on growing the organization - new revenues, new customers, new products, new grants. Costs get out of control and escalate beyond historical levels and ratios. Cash flow problems can occur when profitability declines. When a cash flow crisis occurs the organization is forced to slash costs to regain control. Studies have found these types of cost cutting rounds are not always effective. It is better to have a sustained cost control system so the organization can safely grow and avoid cycles of cash flow crisis.

Controlling Costs by Measurement & Information

If you don’t measure it you cannot control it.

• Goals will not be met if progress is not measured systematically.
• Change will not happen unless progress is measured in understandable ways.
• Decisions will be enhanced with objective and relevant information.
• Productivity, efficiency and recovery require measurement to control.
• Quality of products and services cannot be assured without measurement.

Start with the Accounting System

Measurement and information starts with the accounting system that tracks financial information. Startup and fast growing organizations typically find their financial information lagging their information needs. Financial information that only meets the needs of investors and lenders is not good enough to run the organization. An organization needs financial information relevant to operations of the organizaitons so that leaders, managers and supervisors can all do their jobs effectively, timely and control costs in the organization.

Larger organizations develop increasingly more sophisticated and complex systems to control costs. For example, there are many types of “cost accounting” organizations utilize that go beyond financial accounting. Implementing a cost control system includes three steps:

1. Identifying the correct cost costing system for the organization
2. Implementing the system
3. Training organization members to effectively use the system

Empowerment

Sharing cost, quality, recovery, productivity with team members is empowering. People want a purpose, mission and reason for their work. People like to be proud of their work. Sharing measurment information in the organizations empowers people and builds the culture. Sharing information such as budgets, productivity and cost peformance down through the organization is empowering.

Walk the Talk & Culture

Owners, managers and leaders in the organization need to set the example and “walk the talk”. Talking about being “lean”, “cost effective”, “controlling the budget” and other cost control concepts will not become part of the organizational culture unless those at the top set the example by actions that parallel the message. If those at the top of the organization work by a different standard the efforts to build a cost conscious culture will be undermined. Creating a culture of cost consciousness is time consuming, but powerful.

Related Best Practices

• Cash flow problem
• Accounting System
• Why Companies Fail

Other Resources

• Wikipedia has an informative page on cost accounting
• The ICAEW, a professional accountants organization, provides a 4-page “Directors’ briefing” on cost controls
• "How Can an Organization Implement an Effective Cost Accounting System?", by John Freedman, Demand Media, discusses in an article in the Houston Chronicle the process for implementing an appropriate cost accounting system in smaller organizations

Author

The author of this article is Terry Gardiner.

Terry Gardiner is the founder and President of Silver Lining Seafoods and NorQuest Seafoods - a medium-size Alaska seafood processing company; and currently a Board member of the Anvil Corporation, an employee-owned company specializing in oil and gas engineering.

His co-operative experiences include member director of the Commercial Fishermen Co-operative association; creation of legislation for the Alaska Commercial Fishing and Agriculture Bank; and advisor to the US Dept of Health and Social Services for the state Health CO-OPs.

Terry served ten years as a member of the Alaska House of Representatives -several legislative committee chairmanships, Speaker of the House, Chairman of the Alaska Criminal Code Commission and board member on various state and federal boards and commissions.

His non-profit experiences include National Policy Director for the Small Business Majority in Washington DC; working with the Herndon Alliance and ForTerra.

Terry authored the leadership book, "Six-Word Lessons to Build Effective Leaders: 100 Lessons to Equip Your People to Create Winning Organizations".

For more check: Terry Gardiner Long bio