5.01 – Getting Your Mindset Right
Rethinking Cost Control
When you hear “cost control,” you might immediately think of cutting costs. However, this chapter focuses on a broader perspective of profit management. The best cost isn’t always the lowest cost.
A common reaction is to lower costs, but sometimes, increasing costs can lead to higher profits. Think of it like coaching a sports team: you need both offense and defense. In business, making sales is your offense, while keeping operational costs lower than sales revenue is your defense.
The Planning Process and Budgeting
Planning involves various elements, from gathering market information to evaluating resources and preparing budgets. This chapter highlights the importance of budgeting in the planning process.
Budgets should not be seen merely as expense limits. Instead, they should encompass all critical financial data, including revenue levels, costs of sales, operating expenses, fixed asset expenditures, and capital requirements. While expense management is a part of budgeting, it is not the sole focus.
The budgeting process concludes the planning process. To prepare accurate budgets, forecasts, and projections, you must first gather all necessary data and information. There is no point in preparing a budget that does not reflect your company’s true economic structure.
Getting Your Mindset Right
It’s crucial to avoid unnecessary costs. However, small business owners often need to rethink the nature of costs and understand that costs are pathways to profit. Without costs, there would be no revenue or profit.
The key test of a cost is whether it contributes to generating revenue. If a cost does not help bring in revenue, it’s a waste. The essential question is whether the costs align with the revenue generated. Business owners should ask: Are my expenses appropriate for the revenue of my business?
