Cost management strategies for SMEs

John Cradden outlines the various strategies that small business owners can employ to stay on top of costs, including cost control and cost reduction.

Rising input costs have been a bugbear for Irish SMEs for some time now, but a recent Central Bank analysis from last year shows they have managed to withstand these pressures during 2022 and early 2023 thanks to a combination of prices rises and strong consumer demand.

SMEs are optimistic that this consumer demand will continue well into 2025, with 67% expecting sales to grow in the next six months, according to the 2024 SME Confidence Tracker from Bibby Financial Services.

However, if input costs were to remain stubbornly high in the event of falling demand at some point in the near future, this would affect profit margins, the Central Bank said.

In the quest for profitability and long-term sustainability, the Central Bank projection certainly underlines the importance to SMEs not just of cost control, but cost reduction. These two terms are often used interchangeably but they have very different meanings.

Cost control is about keeping expenses within a set budget by monitoring and regulating ongoing costs to make sure the company is not overspending or going beyond the limits set by the budget.

Cost reduction is about looking for individual areas where costs can be lowered permanently without compromising the overall quality of the product or service.

Naturally, this means that cost control and cost reduction require very different approaches, but together they have the potential to generate savings over the both the short and long-term.

Cost control

You may also hear the term ‘cost management’ used in this context, but this deals with the planning and work that goes into setting the budget in the first instance – the costs and expenses required to deliver a product or service to customers and (hopefully) make a profit.

Cost control comes into play with the process of monitoring and measuring the actual costs against the budget throughout the financial year to determine how close you are to staying within its parameters, and then to make adjustments along the way if and when needed.

Unlike cost reduction, cost control is essentially a reactive measure, triggered when there’s a clear deviation from the agreed budget.

Here are some suggestions for effective cost control:

• Renegotiate with suppliers: It’s likely that you’ll have at least one of your suppliers will land you with an unexpected price increase during the year, which you can turn into a cue to review the competition and see if there is better value elsewhere. Let them know that you are shopping around and watch the better deals come in.
• Focus on inventory management: Keeping on top of your inventory management is an effective cost control measure. This could include reducing the number of items carried in your inventory to reduce storage costs and release capital. You could engage in pre-emptive stocking up of critical items if prices are expected to rise in the future.
• Review expenses: Look regularly with a critical eye on all operating and HR expenses, such as office supplies and equipment, marketing and advertising, insurance policies, and telecommunications and IT services.
• Keep travel expenses to a minimum: The rise of collaborative video tools such as Teams and Zoom means the urgency and cost of travelling to meet people face-to-face is, while not completely eliminated, can be reduced to a more manageable level. If you do have to travel, plan well in advance and book early and set rough company limits regarding the cost of accommodation.
• Hire freelance workers and contractors: There may be times when you need specialised people or just extra manpower to cover busy periods, so outsourcing work to a freelance worker or contractor is a good way to save time and money compared to hiring new staff. They can be paid on a per-hour or per-project basis.
• Look for discounts for prompt payment: If your company’s cashflow is in a good place, you can take advantage of this by seeking and availing of early payment discounts on accounts payable from your suppliers.

Cost reduction

Cost reduction is a more proactive measure than cost control in that the aim is to achieve a consistent and permanent reduction in costs rather keeping ongoing costs to within a set budget throughout the course of a year.

Furthermore, cutting costs can have a significant positive effect on profit margins – but of course only if sales prices and number of sales remain constant. If cost reductions result in a lowering of the quality of the company’s products, you might have to cut prices to maintain sales.

Here are a few ideas for permanent cost reductions:

• Do a sustainability audit: There’s lots of scope to save on energy costs with a range of energy-efficiency supports for businesses to install solar PV panels, improve premises insulation, upgrading the vehicle fleet to EVs and a host of other upgrades. Amid the drive for sustainability, SMEs are understandably wary of the costs of doing so, according to the latest Uisce Éireann SME Sustainability Sentiment Survey, but the good news is that there are a wide range of grant schemes available to help businesses on their green journey.
• Take stock of premises: Downsize your office space if you can, consider renting rather than owning your premises, or adopt a hybrid work model to reduce rent and utility expenses.
• Automation and outsourcing: You can reducing labour costs without compromising quality through careful automation and well-thought-out outsourcing of non-core functions (eg. accounts payable, marketing, IT helpdesk, claims processes etc). These methods can improve efficiency whilst lowering overheads.
• Upgrade your accounting tech: Whatever accounting or ERP (enterprise resource planning) software you use, it should have features that can help with cost control, including variance analysis, target net income and earned value management.

Main image at top: Photo by Scott Graham on Unsplash

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