Cost Control - How to Ensure Profitability Even in Difficult Times

Many startups and scaleups in Germany are suffering from the ongoing challenging economic situation. Raising capital has become more difficult and investors are focusing on profitability instead of growth. For companies, this means increasing efficiencies while reducing costs. In this article, you will learn how cost control can succeed and pave the way to profitability.

To ensure liquidity and profitability in an organization, cost control is essential. It allows costs to be kept in view and ensures financial stability. Costs can be reduced with sound cost control and optimization. As a result, products or services can be offered at more attractive prices and competitiveness can be increased in the long term. In addition, monitoring expenses allows potential cost overruns to be identified at an early stage and countermeasures to be taken.

Cost control does not only refer to cost reduction. It also includes targeted investments, which require a conscious use of financial resources and pay off in terms of sustainable corporate growth.

Analysis of the cost structure - the basis for optimizations?

Since the structures in every organization are different, it makes sense to adapt cost control individually. A decisive factor here is the composition and distribution of costs. These are reflected in a company by its cost structure. A detailed knowledge of this makes it possible to take targeted measures to optimize costs and improve financial stability and profitability.?

There are various methods for examining and evaluating the cost structure and for the subsequent determination of potential savings:?

• Cost type analysis: By classifying costs according to different categories such as material costs, personnel costs and logistics costs, a detailed analysis of the cost structure is made possible. An analysis by cost type is particularly useful for determining which costs in the company have the greatest influence on total costs.?
• Cost center analysis: The allocation of costs to the various cost centers in the company is referred to as cost center analysis. It is carried out on a function-oriented basis according to the different departments in the company. This enables a precise analysis of the cost distribution according to the place where the costs are incurred and the company can find out which areas generate the most costs.?
• Cost object analysis: Cost object analysis assigns costs to individual products, services or orders. The method helps companies to determine the costs for each cost object, which in turn enables an analysis of the profitability and cost-effectiveness of different products or orders. This is particularly important to better understand the drivers of cost origination.?
• ABC analysis: Here, products, customers or other elements are classified according to their value or importance. This allows companies to focus their resources and efforts on those elements that have the greatest impact on business success and to set priorities accordingly.?
• Break-even analysis: This method is used to determine the point at which a company's revenues cover its costs. It helps determine the minimum revenue a business must generate to turn a profit and assists management in making informed decisions about pricing, cost control, and sales volume.

Budget planning comes before cost control

Closely linked to cost control is budget planning. It is essential for companies to ensure that financial goals are achieved and resources are used efficiently, and is the first step in managing financial activities.?

When a budget is prepared, a financial plan is defined that specifies expected revenues, expenses and investments for a given period. The budget serves as a guide for management and allows clear financial goals and expectations to be set.?

Budget planning is usually based on the counterflow method. This means a combination of the planning directions top-down (planning from upper levels of the company downwards) and bottom-up (subdivisions develop plans on their own responsibility). In this process, the management level first defines the preliminary, overarching goals and framework data. In the subsequent bottom-up process, starting from the lowest hierarchical level, the plans are coordinated and summarized step by step. The counterflow process ensures that the strategic goals and measures are coordinated in terms of content and are feasible. At the same time, it ensures that employees can identify with the course taken.?

Budget planning includes the following components:?

• Historical data: Analysis of past financial data, such as sales, costs and profits, is an important basis for budget planning. It enables trends to be identified, seasonal fluctuations to be taken into account and realistic assumptions to be made for the future.?
• Market and competitive Analysis: It is important to understand product or service demand, pricing, customer preferences, and the competitive landscape in order to make realistic revenue and cost projections. Accordingly, a thorough analysis of the market and the competitive situation is essential in budget planning.?
• Cost structure: A detailed analysis of the company's cost structure is essential to support budget planning. Here, all cost types should be identified and evaluated, including fixed costs, variable costs and non-recurring costs. Similarly, it is important to understand the drivers of costs as they have a significant impact on the budget.?
• Business objectives: Budget planning is an important tool for achieving corporate goals, as it directs available funds into the right channels.

Increasing efficiency through cost optimization?

While budget planning sets the financial goals in the company and cost control monitors expenditures, it is cost optimization that ensures that the company's resources are used efficiently to achieve financial goals while maximizing profitability and economy. The close collaboration of these three areas helps companies allocate resources to generate the most value.?

Insights gained in one of these three fields are often also useful in one of the other areas. Results from the cost optimization process can also be incorporated into the budget process, for example, and promote responsible use of available financial resources here by reflecting realistic spending targets.? ?

Cost optimization measures in the company can take different forms. Possible initiatives may include optimizing inefficient business processes, re-evaluating supplier relationships, efficiently managing inventory, and technically improving and automating processes through the use of software.?

Cost optimization measures in the company can take different forms. Possible initiatives may include optimizing inefficient business processes, re-evaluating supplier relationships, efficiently managing inventory, and technically improving and automating processes through the use of software.?

It should be noted that a company's spend management is not exclusively about immediate cost reductions. For example, implementing new technologies, training employees or introducing automation solutions may initially incur costs and only lead to savings in the long term.

Cost efficiency - the "New Normal? ?

Cost optimization, whether short- or long-term, is of great importance to many companies, especially in the current economic climate. Numerous German startups have had to contend with economic uncertainty and the associated difficulties in raising capital in recent months. ?

According to the Deutsche Startup Monitor 2023, only 15 percent of founders currently rate the investment readiness of VCs and business angels positively . That this is more than just a gut feeling is confirmed by KPMG's Venture Pulse Report. According to its findings, there was a 61 percent decline in venture capital investments in Europe in the first six months of 2023 . ?

Accordingly, the financial managers in the startups are challenged to set up their companies more efficiently. For this, cost management is coming into focus and it is necessary to use resources optimally and control costs - especially when revenues are missing. This is the only way they can lay the foundation for growth in an uncertain market environment and overcome economic, technological or political hurdles. And they do. 25.8 percent of the companies surveyed in the Deutsche Startup Monitor implemented cost-cutting programs. 36 percent focused more on profitability. For companies with more than 50 employees, these figures are even higher, at 50.5 and 57.6 percent respectively .?

But how can cost control pave the way to profitability??

One is by increasing cost efficiency. By monitoring and controlling costs, a company can identify and eliminate inefficient processes, waste or unnecessary expenses. This allows costs to be reduced and efficiency to be increased, leading to greater profitability. Often, even as the numbers are being collected, items that are a drain on the budget but do not generate sustainable value stand out. These can include rent for office space that is too large, high fees for consultants, or costs for overly complex software equipment. Minimizing such often unnecessary or excessive expenses can significantly increase a company's profitability.?

Secondly, cost control can enable a company to offer competitive prices by keeping costs low. This makes it possible to attract and retain customers, which helps to increase sales and ultimately profitability. This can be done, for example, by reducing labor costs or lowering operating costs for electricity and water.? ?

Furthermore, monitoring costs can increase the profitability of projects, products and services. For example, companies can reduce the cost of procuring raw materials or services by carefully negotiating with suppliers. In addition, checking product quality, for example, can help minimize waste and returns.?

By controlling costs, a company can also free up financial resources that can be used for investments. These can flow into new technologies, product development or market development and thus contribute to increasing profitability in the long term.

Outlook

The recent past has shown that the business climate for startups and scaleups is not all positive. In difficult economic times, cost control measures become more important. They can help increase profitability and improve liquidity. Companies thus become more resilient and are better prepared for uncertainties.?

But cost control should also be the rule in secure times. However, many companies often focus on revenue growth and growth-oriented investment planning. It is important that companies are aware of the importance of cost control in all economic phases. In an environment where markets and business conditions change rapidly, effective cost control strategies and the ability to adapt flexibly are a major competitive advantage. Organizations that continuously monitor their costs are able to be profitable in the long term and successfully meet the challenges that the market brings.?