Growing up, even when we were kids, we heard this saying, “A penny saved is a penny earned!” , but no one understands this better than a person who has experienced financial problems. Most of us have at some point or another experienced the struggle to keep our expenses in check.
For a small business, especially in a resource-limited environment, which is inevitable, the demands on the owner’s time are huge. In many cases, it comes down to choosing between,
- Do I focus on business development?
- Am I driving operational efficiency?
- Do I focus on keeping employees happy?
- How do you monitor the competitive environment?
- Many of these aspects…
Whereas for most companies the answer is, focus not just on one aspect but on multiple aspects of the business. Usually it comes down to what burns? It means focusing on an aspect of daily operations that requires your attention today or right now.
However, there are some aspects of the work that can be monitored on a regular basis, especially those aspects that can be recorded. Keeping track of every little transaction in your business can be a painful task. Sometimes more than that, especially when there is a team that is expected to do so.
One such aspect is expenses or costs. For a small business, that struggles for the top end and profit at the same time, in a competitive environment, cost control can be the difference between an ongoing profitable business and a business that struggles.
Being able to split expenses into multiple groups – branches, cities, vehicles, people (individuals), departments, etc., may mean that you can hold each of these individual groups responsible for their performance. These are known as cost centers. Associating revenue and cost with specific identifiers helps you break down your business into smaller groups.
A simple example could be a textile company with 3 sales employees, keeping track of sales, discounts, and expenses for each sales employee. Let’s say the focus for this month is maximizing profitability while achieving sales value targets. Tracking each sale with an individual salesperson with the free gifts and discounts they may offer is part of the cost center approach. Here each of the sales personnel can be considered as cost centers. This can help you focus on helping weaker salespeople who,
- achieves sales value targets but at lower profitability,
- Does not achieve sales value targets but is highly profitable (does not give discounts)
- Someone who manages to strike the right balance while staying within the limits of the discounts one can offer
Another example is a company engaged in travel, known as the “Tours and Travels” business in India. These companies usually like to measure the usage of their vehicles and the profitability of each, especially since this is a very competitive space. So, a company that has 5 cars for rent, which are driven by 5 different drivers, definitely wants to know the profitability of each car. Here, each car will be considered as a cost center, which you can identify with a unique registration number. The company may want to allocate costs related to fuel, driver’s salary, road tax paid, tolls paid, drivers allowances, etc., and allocate them to each vehicle. Revenue earned from each trip can also be added in the form of minimum fare + day fare + traffic fee + driver’s allowance in each vehicle. At the end of the day, this cost center based approach, you can determine the profitability of each car, the number of trips per car, the mileage, the revenue earned, the costs incurred to repair, where they exceed budgets, etc.,
A cost center can also be as simple as a department in your business, such as marketing, production, sales, etc., where the expenses incurred can be allocated and tracked. This provides valuable insights into the costs incurred for each department and identifying expenses that you can cut.
This is very valuable data for a business owner to determine the necessary actions to improve the efficiency of his operations by controlling costs, underutilized vehicles, excessive maintenance of some vehicles, etc.,
Having software tools that help you manage this can greatly affect the efficiency and control of the business owner. TallyPrime has a built-in cost center feature and is used to harness the power of information by millions of businesses.
They are smart business tools and processes that, when implemented by businesses, make life easier for owners and more profitable businesses in a sustainable way.