Using Your Budget to Control Costs
our budget must be a
working plan that is used on an ongoing basis. It
should be used proactively on a monthly basis to limit
and track costs in all areas of your business.
Use a Line Item Method
When you created your chart of accounts, you created
a list of general categories such as office expense or
repairs and maintenance. For the purposes of your
profit and loss statement, those categories are all that
is needed. But for the purpose of cost control, you
want to create a forecast broken down into
subcategories in order to track costs in detail.
This will give you specific information on exactly
where the money is being spent so you can monitor
and correct any excesses. Comparing your actual
expenses to the budget and the actual amount spent
earlier on the same items is a good way to see if
costs are still in line.
Monitor on a Regular Basis
the trend is exactly where you want it to be, don't give
up the regular habit of monitoring costs against
budget. This requires accountability on your part and
the part of your managers. Meet with your
management team at the beginning of each quarter
and reinforce the discipline needed to keep costs
Give Budget Authority to Managers
critical element in delegation of work and authority is
assigning responsibility for expenditures and bottom
line results. At the beginning of each period,
identify the amount of money budgeted for each
department manager and ask them to create a list of
priorities. Then, on each reporting period, check the
results of their expenditures against the amounts
budgeted. Perhaps you can include an incentive
program for those who come in under budget, or for
exceeding profit goals.
Use Purchase Orders
Whether in the corporate world or the world of small
business, it is human nature to spend all the money
in the budget because there is always some
marketing idea to squeeze in, some piece of
equipment to upgrade or replace, or some
inventory that is difficult to source and creates the
desire to stockpile. Be disciplined to resist that urge,
and don't forget to explain all the reasons behind your
budget decisions. Require signed Purchase Orders
with any expenditure over a certain amount.
Planning, Budgeting and Forecasting
To avoid a cash flow crisis, you must be proactive and
smart. Create a brief Business Plan to focus your time
and your business. Create a Financial Forecast with
goals and use it as a disciplined budget to monitor
and cut costs.
Be Prepared to Sacrifice
A healthy business can create a great return and
reward you and your employees with tremendous
opportunities. Don't make the mistake of
choosing short-term satisfaction at the risk of long-
term stability. Keep all the expenditures within reason
until the company is well on its feet and able to easily
Consult an expert to assist in the above critical steps -
this can be the difference in making it through a crisis.
Planning, forecasting, budgeting and
cost controls require
specialized expertise. CEO Advisor, Inc. can assist
you in keeping your monthly expenditures within
budget, while continuing to maintain growth and
productivity. Contact us
a no cost,
no obligation discussion on how to achieve your
Our mission is to provide
CEOs and business owners of small to mid-size
needed focus and expertise, coupled with hands-on
advice to grow
your business. To take your business to the next
level, contact Mark Hartsell, MBA, CEO/President at
Mark at MHartsell@CEOAdvisor.com or visit us at
www.CEOAdvisor.com for more information.
|Fixed and Variable Cost Control: Effective Cost Saving Strategies!
Almost any small business will experience
ups and downs. There will be periods when demand
for products and services are strong and customers
are paying their
bills on time. But there will also be periods when
money may not come in as fast as it goes out.
Whether you are coping with a cash flow crisis - or
just looking for ways to save on costs to improve your
company's profitability - the service of a disciplined
third party objective advisor can be the catalyst you
Fixed and Variable Cost Control
First, understanding the difference between
Fixed and Variable Costs is key.
There are two types of costs in business - fixed costs
and variable costs. Fixed costs are those that are not
related to the amount of sales or production. They
usually include rent, insurance, utilities or other
expenses needed for running
such as general and administrative salaries. Fixed
costs can change over a period of time, although the
increase or decrease is not typically connected to
Variable costs tend to be directly related to
business activity. Direct labor, raw materials and
inventory are all costs of goods sold and are perfect
examples of the variable costs of a business.
Inventory has to be kept on hand in the retail industry,
and with increased sales, there has to be an increase
in the inventory, too. Likewise, with raw materials, the
more goods you produce the more raw materials you
will need. Service and production-related businesses
require direct labor and outsourced contractors to
service customers and this is a
variable cost throughout the year.
So now, you must be wondering just how to lower
those expenses in order to control your costs.
Well, there isn't one cut and dry answer, and you will
need to examine your whole business strategy to
determine how to achieve cost savings without
impacting your business adversely. Paradoxically,
sometimes in order to save money you will need to
spend money, such as upgrading the technology or
equipment in use.
Here are some effective cost saving strategies:
Scrutinize your products or services. Make
sure your financials pinpoint your Cost of Goods Sold
and Gross Profit Margin. Quantify which of your
services are the most and the least profitable. Cut
back or eliminate products that give you the least
gross profits, while
investing in those products that are the most lucrative.
Create cost efficiencies to more profitably service your
Make variable costs your target. Monitor and
cut fluctuating costs like direct labor, shipping and
materials first, before targeting fixed costs like general
and administrative salaries, rent and utilities. This is
because cutting back on fixed costs can cause more
financial and operational pain than when variable
costs are cut.
Question every fixed cost in your business.
Look at general and administrative expenses and
for savings, and evaluate marketing programs and
ineffective salespeople to further reduce expenses,
improving your operations. Look at every expense,
including rent and see how
each one adds to the value of your business. Does it
make any difference to the bottom line? Are there any
other options to health care coverage, administrative
salaries, office supplies? Are there better, faster,
cheaper ways of doing things?
Vendor Terms. Work out improved terms with
your vendors. This effort will pay off many times over.
The goal is to pay vendors in a comparable manner
as your customers pay you.
Monitor Receivables. One of the fastest ways
to get into a cash flow crisis is to provide goods or
services to slow-paying customers. Slow paying
customers create a need to tap your line of credit
which in turn increases your interest expense. Being
about monitoring receivables is essential to any
business. Here are other suggestions:
These are hard decisions that can require additional
professional help. CEO Advisor, Inc. provides
advisory services, including cost cutting and
restructuring, sales planning and team building,
acquisitions and other services to CEOs and owners
of small and mid-
Contact us today for a free consultation.
- Send invoices as soon as the product has
been delivered or the service performed. Waiting until
the end of the month just means you wait longer for
- Offer incentives for customers to pay
invoices quickly. Everyone loves better terms - and a
small discount may well off-set the cost of collection
- If you accept credit card payments, shop
around and make sure you're getting the best deal
possible on payment processing.
"During my time with Mark Hartsell, my business
went from a failing company (with a ton of potential) to
a streamlined operation that has consistently been in
the black and has shown a rise from 37% to 66%
gross profit margin during that same period. Without
Mark's intervention, the doors would have been closed
months ago. Though I still have much to learn, thanks
to my year with Mark, I now know how to be a CEO and
run a valuable, profitable company."
|Words of Wisdom
"Winning is not a sometime thing; it's an all time thing.
You don't win once in a while, you don't do things right
once in a while, you do them right all the time. Winning
- Vince Lombardi - Football Coach
|CEO Advisor, Inc. - Member of Accredited Organizations
- Tech Coast Venture Network
- Technology Council
- OC Venture Group
- Institute for Independent Business
Copyright 2008. Hartsell Consulting, Inc., CEO