Practically every entrepreneur seeks alternatives to optimize resources and reduce expenses, aiming to increase profit margins. However, for this to be possible, it is essential to know how to control costs and expenses efficiently.
This means you can easily identify where each expense comes from and which ones can be cut or reduced without causing losses to your operation. If you have a restaurant, buying cheaper rice could drive customers away, for example.
Continue reading to better understand the importance of good cost control, its basic concepts and best practices.
Why is it so important to have good cost and expense control?
A company that wants to incorporate good financial management practices can start by controlling the company’s costs and expenses . This is how the manager will be able to manage all financial resources correctly.
This diagnosis, monitoring and evaluation of the numbers helps a lot in decision-making. With the analysis, it is possible to understand if it is time to open a branch, cut administrative expenses or if there is a way to increase the sales team, for example.
For the most basic control of expenses and costs, a simple spreadsheet will help. It can be an Excel spreadsheet, a Drive spreadsheet, or any other system that makes it easy to record and review data periodically. Below, we’ll share a simple, free template for you to download!
But before you start filling out your spreadsheet, it’s important to understand the differences between costs and expenses. This will help you interpret the numbers more meaningfully, which is essential for making more effective financial decisions.
What are the differences between costs and expenses?
The basic difference between these concepts is as follows: costs are directly related to the company’s product or service and expenses refer to maintaining the activity.
We have created a table with examples of costs and expenses to make it easier to understand, check it out:
| Cost examples | Examples of expenses |
| Raw materials; Salaries of those involved in production; Expenses with logistics for production. | Sales office coffee; Marketing and advertising expenses; Office periodical subscriptions. |
To understand this better, ask yourself the following question: would the lack of this expense affect the company’s production or activity? If the answer is yes, it is considered a cost. If it is no, it is considered an expense.
But why do you need to know these differences? Cost and expense control requires proper categorization of expenses , so that their definition and review can be carried out with objective criteria and better results. Because of this, it is interesting to understand another concept: that of operating expenses.
Operating expenses
A common question about expenses and releases refers to the definition of operating expenses. To answer this question, it is important to check the Income Statement (IS) — a summary of the financial situation in a specific period of time.
It divides operating expenses into:
- Administrative expenses: rent for the administration office, electricity for that office, computers, vehicle insurance, IT maintenance, among other similar expenses;
- Sales expenses: team commissions, marketing expenses, social media advertising, among others in the same category;
This is a good example of how to properly categorize expenses, in order to have a systemic view of the business and understand which areas need more financial resources and those that are receiving more money than necessary.
What are fixed and variable costs and expenses?
In addition to differentiating between costs and expenses , it is possible to go a little further to better understand where the company’s money goes. In the table below, check out the concepts of fixed and variable costs and expenses, and the characteristics of each.
| Fixed | Variables | |
| Costs | Fixed costs are those that do not change according to the volume of product manufacturing. Example: renting a factory. | Variable costs are those that have a proportional relationship to the volume of production. Example: raw materials. |
| Expenses | These are administrative expenses that do not vary according to sales and distribution. Example: IPTU (property tax) for the company’s sales office. | When the sale influences the expense, it is considered variable. Example: the salesperson’s commission. |
What are the main indicators for cost control?
There are different indicators to support a company’s cost control. However, some of them are used frequently and considered more relevant to capture a business’s costs. They are:
Cost of Goods Sold (COGS)
CPV is the total direct and indirect costs involved in the production of a product . This indicator is important because it helps you understand the production and sales costs involved in each product or service sold by the business.
By monitoring it, it is possible to identify which items are generating profits and which may be causing potential losses. This provides greater clarity for strategic decision-making.
Operating expenses
Operating expenses refer to all expenses necessary for the company to function . This includes everything from administrative expenses to payroll, for example.
Its analysis in cost control is important because it is the main indicator for verifying what is essential to operations and what can be cut or even excluded to save costs.
Cash flow
Cash flow is essential to fully visualize the company’s cash inflows and outflows . The amounts recorded include all payments and receipts made during a given period.
Its use allows you to know how much the business has available to use and predict what will still need to be spent each month. More than optimizing cost and expense control, it helps identify investment opportunities and cost reduction.
Stock turnover
Finally, inventory turnover, as the name suggests, allows you to assess the turnover of products offered. This information is essential for identifying which items have the highest and lowest demand.
With this indicator, it is possible to have clarity about the reduction of storage costs, avoid unnecessary investments in products and minimize losses due to expiration. In addition, it allows you to focus efforts on the items that sell the most and optimize costs related to production and inventory.
How to control company costs and expenses? 5 steps
This is the main topic for you who came here looking to know how to have good financial control and understand the origin of each expense.
Strategic planning for cost and expense control will help you find gaps in your accounts and bottlenecks in your cash flow. So, pay attention to these tips:
1. Record and categorize all financial entries
We can only find books in a library when we separate and categorize each one. The same happens when it comes to controlling expenses.
You need to record all financial transactions, i.e. sales, income and other expenses. You should also separate them into categories to more easily identify which sectors are having the most expenses and whether all of them are necessary, for example.
In addition to better managing values and understanding the company’s situation, this process avoids cash flow problems and medium and long-term projections.
The record should be made daily, so that nothing is left out. Using a spreadsheet, if your flow is not very busy, is one option. But the best thing is to have the help of technology and use software, which does everything automatically.
2. Do not mix personal and company accounts
When an entrepreneur does not know how to separate personal and business accounts , he or she has an inadequate understanding of revenue , profit, the need to cut costs and any more realistic perspective of the business’s financial situation.
3. Seek professional help
After separating personal and business expenses and starting to use your spreadsheet, it’s time to consult an accountant. They can help you organize your business’ finances and suggest the best ways to control costs and expenses. With their expertise, an accountant can help you:
- Monitor the evolution of your sales;
- Set spending goals;
- Make an assertive pricing of the product/service;
- See what your real profits are and where they come from;
- Develop strategic planning using financial indicators .
Since there are many documents and data that need to be shared with the accounting department, it is easier to rely on a system that integrates the accounting department with your company’s financial information. This way, both parties will save time on operations and monitor costs and expenses more efficiently.
4. Analyze the costs and expenses of all sectors
You have already learned the difference between costs and expenses and have even seen their types and examples. This information is essential at this point, because it is by knowing how to differentiate between them that the manager can truly analyze all expenses.
By constantly analyzing spending figures , entrepreneurs can easily identify bottlenecks, such as sudden increases or decreases in costs, in a timely manner. This makes finding solutions much easier and problems don’t snowball.
5. Talk to employees
Another point that makes a difference in your spending and expense control is talking to your employees. The business owner is not always able to stay ahead of all operations, so your employees certainly know something that you don’t.
You may think you need to add an additional product to your sales catalog. But in reality, salespeople hear customers say that they would really like an update to what you already sell, for example.
Imagine if, in this case, you didn’t talk to your employees, invested a lot of resources in launching a product, and in the end, it didn’t meet the consumer’s needs. In addition to being frustrating, it would be extremely damaging to the business’s cash flow. So, remember to consider your employees’ opinions!