Cost Savings or Cost Avoidance - What Is The Difference?

One of the basic tenets of good business practice is keeping a lid on extra costs. In procurement, it means strategic sourcing, contract management, vendor management, vendor development, auction strategy. Purchase managers require them to both keep costs down and avoid over expenses. Taking a step further, cost savings and cost avoidance are two business terms that feel similar but have different meanings. Often used interchangeably, their understanding can improve the functioning of overall business operations.

So, if you are in to save some money and maximise profits strategically, let us begin.

What Is Cost Savings?

While expenditures float between “hard costs” and “soft costs”, savings are known as “hard savings.” Cost savings are referred to as “hard savings” because management can comprehend it from the bottom line. They are part of the company’s budget and financial statements.

To maximise cost savings, companies must deploy cost reduction techniques. With this, companies can reduce debt levels and also put a cap on current spending or investment. A comparative data of cost savings in the financial statements can help the management discern the profit margins.

Additionally, a more refined approach will be including planned cost savings in the company’s budget, as it will lay down a path for the coming year’s progress.

What Is Cost Avoidance?

Taking actions continuously to prevent future costs is referred to as cost avoidance. For instance, you have a supplier who is willing to increase his prices by 20%, but the** purchase manager** negotiates to keep it down to 10%. In this way, the CPO has stepped up to avoid incurring costs in the future.

Cost avoidance strategies are highly dependable when it comes to minimising losses in the long run. It is not tangible and cannot be a part of financial statements or budget processes.

Procurement consultants like Procol are well-equipped with technologies to take preemptive action towards prospective costs to incur in the future. Our solutions encompass activities that will prove to be a value for money and help you generate** greater ROI**.

How Procurement Teams Achieve Cost Savings And Cost Avoidance?

There are several ways to reduce the costs incurred by the company. In the procurement setting, the purchase manager can take the mantle to reduce costs in the following circumstances:

• Contract Management:

Whether negotiating a new contract or discussing a contract renewal, the procurement team can use the right set of skills to reduce the overall spend.

• Strategic Sourcing:

One of the better ideas for cost savings is finding the right balance between the sourcing objectives and capabilities of the suppliers. It helps in establishing a synergy between organisations and their suppliers.

• E-procurement:

Streamlining the procurement process with the help of technology can minimise losses and save costs on performing repetitive, mundane tasks. The manager’s awareness about how procurement SaaS and Automation reduces the cost can be fruitful.

• Procure to pay process:

The P2P cycle gives the management an eye to look into the supply chain process by connecting procurement through to the payment of goods. It helps in reducing overall supply chain and inventory costs and improves operational efficiency.

• E-billing:

Digital invoicing eliminates the scope of invoice errors and streamlines data to make it easier for organisations to perform analytics. We have digital invoices for contracts, purchase orders, goods receipts, and service entry sheets.

Unlike savings, cost avoidance is more of a calculated approach to preventing avoidable costs from incurring. Below are a few ways to help your organisation avoid unnecessary expenses:

• Proper Maintenance- Often, we see, if anything is poorly maintained, its life shortens. It happens mostly in cases of working equipment. Hence, management must actively monitor to keep everything in good working order. If you fail, it may lead to expensive repairs or even replacements in the future.
• Spend Regularly- It is advisable to set aside an amount for maintenance schedules regularly. Thus, avoiding any heft cost resulting due to the failure of any machinery.
• Avoid Price Increases- The procurement team can contribute to the cost avoidance efforts of their organisation by evading any potential price increases.

Final Thoughts

We are well aware that business automation reduces costs. Not everything can be automated, but some efforts related to cost savings and cost avoidance in procurement can be. Performing business operations using software and technology is the need in industry 4.0. Finance handling is also a part of that puzzle.

Now businesses can achieve greater ROI by relying on a dedicated procurement consultant like Procol that uses technology to centralise all requests and use them in a structured form. Partnering with Procol to handle procurement will let you generate savings that will be easily verifiable in the bottom line.

Cost-saving opportunities will come thick and fast. Don’t wait any longer to start your savings journey. Click here.