What is Cost Avoidance?
Cost avoidance has to do with any action that avoids having to incur costs in the future. In a business setting, the cost avoidance is a measure that lowers potential increased expenses as a way of decreasing a company’s future costs.
In cost avoidance measures, the action is taken in order to reduce future costs. An example of future costs can include the replacement of certain mechanical parts that are used within a business before they fail and cause damage to other parts. In simpler words, cost avoidance really constitutes a specific set of preemptive actions that avert any prospective increases in future costs. Cost avoidance is not something that is reflected or measured in a company’s financial statements or in a company’s financial budget.
In the short run, cost avoidance may, in fact, incur temporary additional costs; however, these additional costs take place in order to lower a company’s future prospective costs. An example of such a scenario could be if a company is planning to increase its sales volume by reaching new geographic locations that are located at distances that are far from their headquarters. A company, especially seen in the case of startup companies, maybe lacking the necessary salespeople that could potentially help to support this plan and make it a reality. The company could choose to undergo incremental spending, that has to do with increasing their sales force size through addition people. The company could also choose to undergo a one-time investment, in which it would invest in new advanced technology that would allow its current sales force to work remotely, and spend more time in the field.
Based on the current business scenario, the company decides that investing in new technology is the better option. This way, the company will be able to avoid spending on compensation costs, as well as in subsequent years.
This is a perfect example of a company undergoing cost avoidance, which avoids having to incur costs in the foreseeable future of the company. Cost avoidance is something that is never reflected in the budget or in the company’s financial statements, in contrast to the way that cost savings are reflected onto both the company’s budget and onto the company’s financial statements.
Hard Cost vs Soft Cost
In definition, a hard cost is the purchasing price of a hard asset. A hard cost is a direct cost; any tangible asset, that will usually hold intrinsic value. Examples of hard costs include company inventory, the purchasing of company equipment, or an advanced machine, or the purchasing of a building or land. A hard cost is fairly easy to estimate; this is because the cost is as-is when incurred.
A soft cost has to do with the purchasing costs that are intangible. These are costs that are not considered to be direct costs; they are indirect costs. Soft costs could include financial, banking, accounting, or a company’s legal costs. Unlike a hard cost which is easy to calculate, a soft is more difficult to quantify. This is the case because soft costs are indirect costs which are also difficult to forecast since its growth can continue succeeding a project’s completion.
What are Value Added Services
Value-added services have to do with services that are available at no cost, or at little cost, that promotes a business primarily. Value-added services are one of the ways that companies can deliver cost avoidance. Through value-added services and goods, companies can avoid the increment of future costs.
What are the soft savings? By definition, a soft saving is the intangible benefit of continuous company improvement. Unlike in the case of a hard saving, a soft saving cannot be pointed to on an invoice, a receipt, or a financial record. Soft savings include both capacity enhancement and cost avoidance.
Examples of Soft Savings
- Capacity Enhancement Avoidance
- An increase in Workplace Safety
- Customer Satisfaction Increase
- Employee Satisfaction Increase
- Cash Flow Reduction
- Conformation to Law-Related Changes
- Need for Work Capital Reduction
What are Cost Savings?
Cost savings, also known as “hard savings,” have to do with any action that lowers investment, current spending, or debt levels. Cost savings are extremely beneficial to companies and organizations in regards to their finances. A company’s next year’s budget and financial statements should always include the amount of money that is saved through cost savings. Planned cost savings should be reflected in a company’s financial budget as well. Additionally, cost savings in comparison to prior periods should generally also be included in a company’s financial statements. This will ensure that companies are effectively measuring cost savings in regards to profit, throughout the years.
Cost savings have to do with any action that results in a tangible financial benefit, which is reflected in a company’s financial statements, as well as in a company’s financial budget records.
Cost Savings Examples
Price negotiations are a very common example of cost savings within a company. An example of price negotiations can be seen in a company’s procurement department. If a company has been paying a fixed amount of money for a particular period of time but the company undergoes an increase in its purchasing volume, the company can choose to negotiate the price down. As a result of a price negotiation, the company can obtain cost savings, which will be reflected in lower materials cost in the company’s budget, and in the actual financial results for the next fiscal year.
New Contracts and Contract Renewals
New contracts and contract renewals hold great opportunities for cost savings. This could also be the case in scenarios in which a company is in the process of relocating its office to a new location. In such situations, the company may have the opportunity to save on utility costs. At their previous location, the company may have been paying for the lease payment separate from utilities. Perhaps the utilities are included in the lease payment at the company’s new location. If this is the case, then this is a perfect example demonstrating the cost savings from the company’s initiative.
Partnerships are another example of cost savings within a company. A company can find a partner that will help to reduce their costs. An example of this can be seen in the case of partnering with a cloud platform in order to help a company to eliminate the need for operating and owning their own computing infrastructure.
Hard savings are the opposite of soft savings. Whereas a soft saving is the intangible benefit of continuous company improvement, hard savings are tangible direct savings and are directly linked to the “profit and loss statement. Unlike in the case of soft savings, a hard saving can be pointed to on an invoice, a receipt, or a financial record. Cost savings are also known as hard savings.
How to Calculate Cost Savings
When you are calculating cost savings, what you are ultimately calculating is the cost savings percentage.
The first thing you have to do is determine the original price of the product or service that you are potentially saving from; this is the retail price, which you use as the “original price” during your calculations.
Next, you have to determine the new price of the product or service that you will be potentially saving from. In the case company savings, the new price is the price after negotiation, a discount, a deal, or a sales promotion.
Next, you have to determine the difference in price between the original price of the product or service, and its new price. In order to figure out this difference, you have to subtract the new price from the original price.
After you have successfully found the difference in price, you have to divide this price difference by the original price.
Cost Savings Percentage
Following this, you have to multiply the decimal by 100, in order to convert your number into a percentage. The percentage that you calculate, is your cost savings percentage.
How to Maximize Cost Savings
There are many ways that companies and organizations can maximize cost savings. After thorough research, we have conducted a list below, with a few ways that companies and organizations can best maximize their cost savings.
Technology has been known to have the ability to decrease operational costs and maximize cost savings tremendously in the world of business and not only. One way to really take advantage of the ever-changing business world is to evaluate your business’s current administrative processes. The question that you should be asking, is whether there are certain areas within your business or organization, that can instead be automated using technology. Staying up to date with the latest technological advancements within your business will not only put you ahead of the game but is something that is also sure to cut your company’s operational costs significantly.
There are a number of online solutions that can help your company perform the tasks that it is currently performing with a fraction of the cost that your company is spending at the moment. This is the case because employing human resources can be very costly, and especially in our modern technological era. By saving the daily manual efforts of employees, your employees can instead focus on using that time that will potentially be replaced, to improve productivity in other areas within the business.
Through the use of technology, your business or organization can also save time and money that is wasted on the appearance of human errors.
Outsourcing is a huge trend in our current modern era, and especially when it comes to cost savings. Technology and globalization during the 21st century have made outsourcing especially easy and economical. Outsourcing can help businesses and organizations cut in their operational costs significantly. Outsourcing can prove to be especially beneficial for small IT businesses, which do not necessarily need full-time employees to effectively run their business. An example of outsourcing within the setting of a small IT business could be using outsourcing for hardware related support, rather than hiring full-time hardware engineers. This way, your business, and your employees can instead devote valuable time on areas such as business revenue growth.
Lower Marketing Costs
Traditional marketing costs in the business world have begun to become outdated, and instead, replaced by new forms of advertising. This is especially noticed in the area of social media, which is becoming increasingly popular for PR and marketing tactics. There are more effective and successful ways that can help your business or organization to reach millions of users and consumers online, in a matter of seconds. This includes both paid and unpaid advertising opportunities. Rather than hiring a traditional marketing agency, your company can increase its sales and revenue by using the internet, and more specifically, social media platforms. If you want to be successful and really target your target audience, then the Internet is really your best bet. Nowadays, companies are increasing their social media presence more than ever seen before. Using such tactics to replace the hiring of traditional marketing agencies can truly help a company or organization to maximize their cost savings in one of the best ways possible.
Cost Avoidance vs Cost Savings: What is the difference?
So what exactly is the difference between cost avoidance and cost savings? Cost avoidance has all to do with taking action to reduce a company’s foreseeable costs. Cost avoidance is the measure that lowers potential increased expenses as a way of decreasing a company’s future costs. On the other hand, cost savings have to do with tangible savings and action that is taken in order to result in a company’s benefit financially. Cost savings are always to be reflected in a company’s financial statements, as well as in a company’s financial budget records, while cost avoidance is neither reflected in a company’s financial statements nor in a company’s financial budget. Cost avoidance is concerned with “soft savings,” and involved reducing the rate of cost increases, through value-added services, for example. Cost savings, on the other hand, are related to tangible “hard savings,” which have an immediate effect on costs.