There are effective ways to minimize the expenses in your business. It all takes knowledge about cost avoidance and cost savings.
Expenses in business are unavoidable
It also serves as a driving force to gain or attract potential customers and produce your product efficiently. It all takes a skill of being money smart. Keeping your expenses at a minimum level and refusing to spend on things that are not essential is the first step. Your management in maintaining your cash flow and revenue will help you establish a firmer foundation in your business. Now, businesses need to take a big leap to understand their business operations’ impact and make changes depending on the current situation.
Cost avoidance and cost savings are often interchanged
Business owners think that those terms are the same. It is not the same, and there are specific features on both terms. The key similarity between cost savings and cost avoidance is that they help businesses and companies secure and manage their money.
What is Cost Avoidance
Cost avoidance primarily focuses on the actions businesses take to avoid additional expenses in the future. It allows you to take and create ways to reduce the potential increase in your company’s expenses. It allows you to budget your spending and plan for your company.
You are leading and taking action to reduce future costs
Examples of cost avoidance include making sure that you maintain and properly follow your schedule of transactions. Regularly checking your equipment is another cost avoidance measures. It allows you to know the needs of your company and take action immediately. Remember, once you fail to keep your business in excellent working order, you will suffer from expensive repairs and replacements in the future. Also, allowing your employees to operate your equipment or vehicles in poor condition increases the chance of an accident and goes beyond your planned budget.
All actions that you do in order to avoid the additional cost in the future is cost avoidance. You cannot easily measure and see the effects of this process in the financial statements or budget of your company. But it surely helps you manage all tasks well.
Cost avoidance measures will require you to spend money temporarily in the short run. At first, you will notice that your expenses are elevated. But, it is your preparation to lower your expenses in the future, making your business expenses at the bare minimum.
Another example is when your company decides to expand its business to a new location. It would help if you boosted the sales volume to survive. But, there is also a possibility that you do not have enough resources to boost your target market sales. In this situation, your company can proceed to incremental spending to boost the salesforce. Another option is for your company to make a one-time investment to buy the latest technology to gather more information and let your sales force work from home. They can spend more time in the field and focus on your business.
Cost avoidance also takes into account the value-added services. Most of the services that you can use cost little or even free for your business. This will help your company in the long-run. For example, when you bough fleet vehicles for your business operations. You can directly ask the dealer about the extended warranty or even free oil for the lease, which can help you save money in the long run. Remember, taking the initiative and keeping your company costs down improves your indirect spending.
What is the hard cost and soft cost
To start a company, spending is necessary. And there are two types of purchases, the hard cost, and the soft cost. But what is the difference between the two?
Hard cost is the market price of your hard savings assets. It is direct that is usually known as tangible assets, and it has an intrinsic value. For example, buying equipment, inventory, land, or facilities are all examples of hard costs. Hard cost purchases are easy to estimate because their cost remains the same once incurred.
Soft costs, on the other hand, are known as intangible items. You spend it indirectly. This includes accounting, legal costs, and the like. It is hard to quantify because it changes all the time, and it is not easy to forecast. The company’s long growth under soft cost keeps the business project successful.
The continuous effort of the company to improve is the intangible benefit of soft savings. This account is not reflected in the financial records like invoices or even receipts. You can directly see it in the enhancement and cost avoidance measures of the business. The best example of this is the improvement in the workplace environment, making it safe for everyone. Ensuring that employee and customer satisfaction are also the top priority under these cost avoidance measures. It all takes a huge step forward, complying with the state legislation and lowering the business’s working capital.
What is Cost Savings
The key difference between cost savings and cost avoidance is, cost savings are directly seen in your business financial statements and company budget. You can also refer cost savings as your hard savings. Having this goal in mind, you can easily grasp the idea of reducing your company’s debt levels, current spending, investment. It would be best if your company’s financial statement highlights the savings that you achieved through cost savings. Planning what you do in your cost savings is also part of your budget. And to know if you are working towards your goal, you compare the previous periods and add them to your business financial statements. In return, you can effectively know your cost savings and compare it to your profit every year.
In simpler terms, cost savings is any action that you do in the organization that allows you to create tangible financial advantages.
What are the Examples of Cost Saving
Partnership with Other Companies. Connection through a partnership is one of the ways to reduce the cost of your company. Having a cloud service provider as a partner, for example, will help you reduce the cost of building and maintaining the computing infrastructure in your premise.
Contract Renewals and New Contracts
Another life hack that you can have in your business is when a contract is negotiated. There are potential cost-savings in it even though it is for renewal or initial contract. You can get the best deals by reducing the price of your long contract. You can also have it through value-added services and let your procurement staff work with the potential sellers. Your contract can help you limit price increase in the future, and enjoy the discount for years.
Negotiations for the Price
Procurement can create a huge impact on your overall organization budget. For example, if you buy something in bulk, you can ask the vendor for a discount or lower the product’s lower price. You can ask your procurement team for the new price of the item and take action for the next budget.
How to Calculate Cost Saving
There are various steps or terms that you need to consider in calculating your business’s cost savings. Here is the first step towards your goal.
Determining the cost of the service or product that you need is the first step. You will use the original price in your calculations and your next year budget.
The next step of knowing the original price is setting up the new price. The price of the service or the product will give you hindsight on how much you will save. You can have this price after the deal, discount, sales promotion, or after the negotiation.
The difference in the Price
Planned cost savings comes with knowing how much will you save. You can compute it by subtracting the original price from the new price. After this, divide the difference by the original price. After that, multiply it by 100 to get the cost-saving percentage.
How to Maximize Cost Savings
Reduction on the Market Cost
The presence of technology allows you to take various actions on promoting your business online. One way to do that is through social media platforms and the maximization of search engines. You can enjoy the benefits of paid and free advertisement. It will help you reach millions of people in a short span of time and low cost. Take note, having a social media expert will assist you in marketing your business or organization. With this technology, you do not need to hire a marketing agency to increase your sales. With this, you can improve your sales returns and save more money.
Cost-saving measures technology that you can effectively use. One of which is outsourcing. This opens up opportunities for your company to get talented individuals to work in your organization. You can easily process improvements and manage the next year’s budget. Hiring a freelancer will also help you manage your company and increase the productivity of your team.
Technology can lower current spending, decrease your company’s operational cost, and increase cost savings. To do this, evaluate your business’s administrative processes, and improve what is left out. Take into account all areas that can be substituted by technology. Having the latest technology in the market can help you reduce the operational cost of your business.
Cost Avoidance vs Cost Savings
Cost avoidance and cost savings are important concepts in the business. Cost avoidance focuses on lowering potential expenses by reducing your company’s debt levels. On the other hand, cost savings focus on your tangible assets that will be reflected in the future improvements of your company. Cost avoidance deals with your soft savings, while cost savings are reflected in your hard savings.