Starting a Business

How to get started with strategic cost management

Make proactive cost management part of your business planning to control your expenses.

Published: May 22, 2016
Updated: February 08, 2017

In order to achieve long-term sustainability, you need to have a solid grasp on your business's finances. Many companies know they need to lower costs and begin cutting expenses wherever they can, but it's in your business's best interest to take a more tactical approach. Albert Bates, principal of the Distribution Performance Project, recommends looking at circumstances proactively.

Bates points out that the primary difference between strategic cost management and cost cutting is the strategy employed. "Cost cutting is a slash and burn approach. It's going in with the approach of, 'I need to cut five percent of costs,'" he says. "Strategic cost management is a process. It's sitting back and thinking about costs which are no longer beneficial to you, so you can put money into the things that are valuable to your business, and make more money in the long run."

Strategic cost management in action

The concept of strategic cost management may sound big, but implementing elements of the approach is actually a manageable task. Bates notes that it's a very situational process, and what works for one company may not work for another. Get started by considering what you want to accomplish in the long-term and identifying the costs vital to that mission. For instance, if you want to expand your business to a new location, you're definitely going to need money to lease the new space. On the other hand, you might be able to hold off on upgrading your computer system.

Use these tips to take an honest look at your everyday activities and expenses so you can execute a strategic cost management plan.

  • Change your buying habits. Consider buying office supplies in bulk from warehouse clubs where you can find the best price and cut back on your ordering frequency. Another perk: you'll have most items on single receipts, which will be considerably more convenient when tax season comes around.

  • Join a co-op. Co-ops provide small business owners with the opportunity to purchase items in larger quantities, which can often help you get deals on anything from health insurance to utilities. Consult your local chamber of commerce or trade organization for information on co-ops that might be available for you to join. Some chambers of commerce even offer their own co-op.

  • Categorize your customers. Bates emphasizes that businesses have some customers who make them a lot of money, and some who they lose money on. So reconsider keeping the customers who lose money for the business. "You could also strategize a way to bring those customers' margins up," Bates says. "Consider upping your prices or limiting the size of small orders."

  • Compare prices. There are several items that you may renew without a second thought each year: insurance, company cell phone plans and Wi-Fi, for instance. But you may actually be able to save a substantial amount of cash by looking into the prices of alternate providers. There may be promotions you can take advantage of or other service providers offering better prices.

Though each company has a different financial situation, everyone can benefit from regularly evaluating expenses that help—or hold back—your business. "If you see that something isn't working and costing you too much money—change it," says Bates. "Get a strategy together and stick with it."