The Advantages of Cost Control

The general principle of operating a business is to make a profit. Right? But, what is the best way to make that happen? The answer is cost controls. If you start out the year with the goal of making a specific profit level, then having an effective set of cost controls improves the likelihood of achieving that profit objective.


The advantage of cost controls is that it enables the company to increase its profits and to use those funds to improve all aspects of its operations.

Cost Control Importance for the Company

Effective cost controls create significant opportunities for a business.

Pay down debt: Paying off debt is always a good move. A lower debt load reduces the ratio of debt to equity.

Improve creditworthiness: A lower debt-to-equity ratio improves the financial strength of the firm and increases its credit rating.

Purchase better equipment: With better profits, an owner can buy more efficient and updated equipment. It could be high-speed manufacturing machines or better computers and software for the office.

Reduce repair and maintenance costs: New equipment needs less maintenance: You will spend less money on repairing old equipment that breaks down.

Increase budgets for marketing and advertising: A more efficient operation generates more funds for aggressive sales campaigns. More sales and new equipment lead to better profits.

Improve your competitive advantage: For a company to stay in business, it needs to maintain an efficient operation, which gives it a competitive advantage. This means more investment in better capital equipment, and increased productivity from employees.

Employees are Affected, Too

Improve productivity: Employees will generally do what you tell them to do. But they need direction. Cost controls give employees guidelines and objectives on how well they need to perform their jobs.

Create culture to control costs: When employees are given the directives to control costs, it becomes a mantra for the entire company. Costs controls create a mindset for employees to find ways to eliminate waste.

Increase pay for employees: With better profits, the owner has more flexibility to increase wages for employees.

Better employee morale: When employees are focused on cost controls, and they see the results of their efforts in their paychecks, morale is improved, and they enjoy coming to work. Employee turnover goes down.

Hire better employees: Firms that can pay higher wages are able to attract better employees.

Aid to Planning

Create budgets: Cost controls are the foundation for creating budgets. They detail how the company intends to make a profit.

Allocate responsibility for cost controls: A budget defines the costs of the company's operations and identifies who is responsible for making sure that actual costs are in line with the budget.

Better records: You can't determine costs without having good records that produce accurate data. Setting up cost controls forces bookkeepers and accountants to put out the most precise information.

Measurement of Performance

Key performance indicators are drawn from the budget for specific areas of cost controls. This enables the owner to periodically check on the performance of the business to make sure it is functioning in compliance with the budget. If so, then the intended profit objective will be reached.

Cost controls are an essential function for all small business owners. Every business should start the year with a profit plan, and everyone needs to understand their role in achieving that profit objective. Cost controls are the mechanisms that an owner can use to monitor the performance of the business and improve its operations.