Last week I considered the question “Were my budgets prudent or overly optimistic?” thank you for your comments, it is great to know that this blog series is being well received and it is generating questions for you in your own business such as ‘How do I put together a sales forecast’? A topic we will come back to in a later blog.
This week I consider the business’s ability to react to circumstances during the year and to control costs in light of actual results to ensure overall financial objectives can be met.
Cost control in the light of actual results
If we were anticipating growth within our business we often have to invest in increasing capacity prior to the realisation of that growth. It is critical to get the timing of this right so the investment is made as the business case becomes certain and is not based on an overly optimistic forecast.
Cost increases in business take on one of two forms – either a variable cost increase, which rises proportionally to sales, an example of this may be eBay seller fees or staff overtime; or a stepped cost increase where there is an additional substantial increase in the cost base, for instance moving to different premises or taking on a new team member.
In a growing business, overhead creep is common where stepped cost increases are taken too soon in response to sales growth that may be aspirational, temporary or seasonal. It may be that until sales growth is fully established variable cost growth would be more appropriate; for instance outsourcing arrangements or overtime. It is therefore important that each decision that impacts cost is carefully considered on its own merit before commitment regardless of the budgeting process.
Reflect on the last year, which new costs did you incur that could have been avoided or reduced if you had approached things differently?
In my own business, I have often held off too late in taking on additional resource, this has had a financial cost saving but a negative lifestyle impact as working hours increase and personal effectiveness reduces. For some clients the reverse can be true. However, it is also my tendency to delay when needing to make cost savings too, in fact I must confess to paying mobile phone contracts no longer in use because there is no process of identifying and terminating where costs no longer serve the business. The key here is responsiveness and scalability.
Where do you sit on this? Do you tend to commit to cost too soon or too late? Do you have a good process of cost review and reforecast to ensure that your end result for the year is not a surprise and you can ‘cut your cloth’ in response to changes in sales?
Next week we consider business effectiveness and the ‘lie of busyness’ – and working smarter not harder. Again I’d love to hear any comments you may have on this blog series so please do get in touch!