Running a successful business involves managing costs effectively. Two essential strategies come into play: Cost Avoidance and Cost Effectiveness. Let’s explore what they mean and how they impact your organization.
Cost Avoidance:
Cost Avoidance means evaluating your costs to see what expenses can be avoided. It is a proactive measure where we focus on mitigating or eliminating potential costs before they occur.
A necessary element of running a business is using some level of Cost Avoidance, common measures might include:
- Eliminating the cost of subscriptions that you no longer use or
- Talking to your landlord about reducing your rent
- Or reducing your insurance costs
These are valuable activities and good examples of cost avoidance. However, we don’t want to avoid expenses to the extent that we lose our ability to save money in the future. This analysis is what we call a Cost-effective solution.
Cost Effectiveness:
Cost Effectiveness evaluates whether the benefits gained from an investment outweigh the associated costs. It is a tool to forecast whether a new cost will have greater benefits in the long run.
Every day we are looking for ways to make our clients more profitable. Sometimes we see organizations use cost avoidance when it is not helping them in the long run. Instead, we prefer to use Cost-Effective Solutions.
Real-Life Example:
Let's look at an example using Bill.com as a cost-effective solution.
Bill.com is an accounts payable system that has a hefty fee of $40 a month, plus a cost per transaction. However, there are substantial cost savings due to using the service; including: you don’t have to manually print checks, you don’t have to buy checks, you don’t have to put a stamp on an envelope and go to the mailbox. Other benefits include the reduction of human errors because Bill.com automatically pulls amounts, invoice numbers, and dates. All you have to do is scan and make sure the original invoice is correct. In this case, not using bill.com is going to cost you more money in the long run. It is more cost-effective to use this system.
A real-life example recently, I saw an organization rush to make a change to use their bank’s bill pay system. It was a cost-avoidance strategy. Most bank bill pay services are dual entry services. In the future, they will be entering the bill into the bank and again in QuickBooks. This solution may cause the organization unnecessary start-up costs and extra time to manage paying bills in the future.
Balancing Both Strategies
An example of a cost-effective solution might be whether or not to hire a new employee. We may evaluate the expense of a new hire, including hard costs and soft costs. We may analyze our need for that employee and what we would gain from their contribution to our team. Perhaps our financial projections do not make space for the new employee compared to what we would gain. We may even make a financial goal to hire that new position in the future. This is when our Cost-effective evaluation tells us not to take on the new cost.
Remember, both strategies play a crucial role in financial decision-making, and understanding their nuances will empower organizations to make informed decisions. This allows you to invest in areas that drive growth rather than wasting resources on unnecessary expenses.
If you have questions about using bill.com or other cost-effective solutions for your organization, give us a call- we are here to help. One of our Core Values here at BudgetEase is Cost Effective Solutions!
