Cost Structuring and Savings

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Cost Structuring

Cost structuring and savings

Knowing your cost structure is imperative for companies, in particular manufacturing companies, to determine your product unit cost at the most beneficial cost and increase profitability.

Cost savings is the benefit realized from actions that reduce a company’s overall spending that directly impact its bottom line and includes actions that can result in cost savings range from improving efficiency to negotiating lower prices for supply purchases. It is the reduction of your business expenses and increasing your profitability.

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Cost Structuring

Cost Structuring refers to those costs or expenses (fixed and variable costs) that a business will or have to incur in the future to produce and obtain the objective of the company, which could include the cost of purchasing raw material or the cost of packaging for finished products. Cost structuring refers to the process of organizing and categorizing your expenses to better understand where your money is going, which assist you in identify areas where you may be overspending or where you could potentially cut costs. Every part of the business is associated with different types of business costs right from production, to marketing, to sales.

Types of cost structure

  1. Fixed Costs: is the cost or overhead cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term period. It is the type of cost that is not dependent on the business activity but is costs associated with a period, for example warehouse rental, is fixed for a period, usually a year, irrespective of how many items are produced and stored in the warehouse.
  2. Variable Costs: is the cost or expenses that is affected by any decrease or increase in the number of units produced, it is the type of cost that is dependent on the business activity (output) of the company, for example direct raw materials or direct labour costs.
  3. Operating Costs: types of business costs which are associated with everyday transactions and business activities but cannot be traced back to one specific product. Operating costs can also be classified into fixed or variable depending on the nature of the business and the nature of activities conducted every day, such as insurance costs. The operating cost ratio for a company can be calculated which indicates how efficiently an organization is generating sales by utilizing their costs.

How to improve your cost structuring

  1. Categorize your expenses: Create categories for your expenses, such as salaries, rent, utilities, supplies, etc. as this will assist you to easily track and analyse your spending and ease report writing.
  2. Analyse your expenses: Once you have categorized your expenses, analyse them to see where you are spending the most money. Are there any areas where you can cut back or negotiate better prices?
  3. Prioritize your spending: After analysing your expenses, prioritize your spending to ensure that you are allocating your resources in the most effective way possible.
  4. Review and adjust: Review and monitor your expenses on a regular basis, weekly, bi-weekly or monthly and adjust your spending as needed to ensure that you are staying within your budget.

Cost Savings

Cost savings refers to any actions taken to reduce expenses and increase profitability. It is a set of actions or policies applied over a period to reduce the historical or expected cost of a given transaction, implementing measures to shrink the amount of money being paid for a certain goods or services.

How to derive cost savings

  1. Negotiate better prices: Whether it’s with your suppliers or your service providers, negotiating better prices can significantly reduce your expenses.
  2. Reduce waste: Analyse your operations to identify areas where you can reduce waste for example, using more energy-efficient equipment, implementing recycling programs, or reducing paper usage.
  3. Embrace technology: Technology can help you automate processes, streamline operations, and reduce costs BY implement or upgrading your software and other tools that can help you save time and money.
  4. Improve efficiency: Improve your efficiency, such as optimizing your inventory management or improving your production processes.
  5. Invest in your employees: Your employees are your greatest asset. Investing in their training and development can help them to become more productive and efficient which can ultimately lead to cost savings.
  6. Cost Comparison: Obtaining costs from at least three different suppliers will normally be required to say that a cost-savings approach is applied.