Are you operating cost efficiently?

27 Sep Are you operating cost efficiently?

As your business grows, one of the primary ways to keep costs under control is to formally coordinate all purchasing activities.

Coordination of spending may seem straightforward, especially when all or most of it is done by the company’s owner. However such purchasing should not be random. Even a relatively small company can benefit by establishing a finance committee which meets regularly to discuss and determine all important product and service spending.

The simple act of meeting focuses greater attention on coordinating spending and can save a small company thousands of dollars a year.

Once a focused approach is adopted a master list of spending categories should be drawn up. Priorities need to be set, with an overall budget divided among the specific categories.

Spending categories could include:-

1) Direct expenses related to the company’s core business, including raw materials and supplies.

2) Professional services (legal, consulting, public relations and marketing, outside accounting, professional training, etc.)

3) Office expenses (office supplies, copying, furniture, decorations, etc.)

4) Travel expenses (airfare, hotels, car rental, food, etc.)

5) Utilities (electric, water, gas, etc.)

6) Information systems (hardware, software, Internet, phone, courier, mail)

7) Employee costs

One of the central goals of spending control should be the definition of cost limits for all targeted products and services. For example, a growing business may contract with an outside consultant to suggest and supply computer equipment.

If the relationship with this consultant is not defined properly from the beginning in terms of objectives, timing, responsibilities and performance, the total cost could expand to many times the initial projections.

Smaller businesses can benefit from including the company accountant or business adviser(s) on the purchasing team so that all purchasing decisions can be better integrated with projected cash flows. Teams should always set prudent projections for future company income so that expenditures can be realistic. At Forsythes Advisors our business packages include such service.

As a company grows, the responsibility for indirect spending usually tends to move further from owners, who may prefer to be involved in more ‘strategic’ activities. Few things, however, affect the long-term growth and profitability of a company more than does the sum total of indirect spending.

Top management should maintain involvement in the process, helping to guide and budget expenditure. Bear in mind that every dollar that is directly or indirectly saved in purchasing falls all the way to the bottom line.

If you think you can operate more cost effectively give business improvement Partner Ross Holding a call.  He will show you how to grow your bottom line by working smarter not harder.

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Forsythes Business and Financial Advisors
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