Business cost management: Take control of your expenses

Published Wednesday 5 November 2025

Table of contents

• What is business cost management?
• Why cost management matters for your business
• Understanding different types of business costs
• Create a budget
• Monitor expenses regularly
• Look for cost-saving opportunities
• Plan for unexpected costs
• Take control of your business costs
• Frequently asked questions about business cost management

Key takeaways

• Create a comprehensive budget that forecasts earnings, plans expenditure, and holds you accountable by tracking actual performance against projections to improve cash flow and enable strategic resource allocation.

• Monitor expenses regularly using structured tracking systems to detect costly errors early, understand true profitability, and identify opportunities to reduce unnecessary spending before it impacts your bottom line.

• Implement proven cost-saving strategies by negotiating with vendors, working with tax professionals to maximize deductions, reducing energy consumption, and benchmarking against industry competitors to identify areas for improvement.

• Establish financial protection by creating a contingency fund of 5-10% of your budget, purchasing appropriate business insurance, and maintaining 3-6 months of operating expenses in cash reserves to handle unexpected costs without disrupting operations.

What is business cost management?

Business cost management is the process of planning, monitoring, and controlling your company’s expenses to improve profitability and cash flow. It helps you identify where money is going and find opportunities to reduce unnecessary spending.

Rising prices and economic uncertainty make effective cost management more critical than ever, especially as corporate discussions about price increases peaked in 2022 when inflation was at its highest. This guide shows you practical strategies to control expenses and put your business in a stronger financial position.

Why cost management matters for your business

Effective cost management does more than just save you money. It gives you a clear picture of your financial health, helping you make confident decisions. By keeping costs in check, you can free up cash for growth, handle unexpected challenges, and improve your bottom line. It’s a key part of running a sustainable and profitable business.

Understanding different types of business costs

To manage costs well, you first need to know what they are. Business costs generally fall into a few categories:

• Fixed costs: These are the expenses that stay the same each month, like rent, insurance, or software subscriptions.
• Variable costs: These costs change depending on your business activity, such as raw materials, shipping fees, or sales commissions.
• Unexpected costs: These are one-off expenses you didn’t plan for, like an equipment repair or a sudden price increase from a supplier.

Knowing the difference helps you budget more accurately and spot areas where you can save.

Create a budget

Budgeting helps you estimate income and expenses over a set period to ensure you have money available for your goals. It can also help you secure business loans or investments when needed.

Creating an effective budget serves three key purposes:

• Forecast earnings: Predict how much revenue you’ll generate
• Plan expenditure: Allocate funds for necessary expenses and growth
• Hold yourself accountable: Track actual performance against your projections

Effective budgeting delivers measurable benefits:

• Improved cash flow: Know exactly when money comes in and goes out
• Greater focus: Prioritize spending on what matters most
• Accurate goal setting: Base targets on realistic financial projections
• Better resource planning: Allocate funds strategically across your business

If you’re a new business, a small business owner or you’re just getting started with budgeting, your first step is to create a financial plan for the year ahead. You’ll want to consider your expected expenses and projected income to do this accurately. You can then create a budget to track your income and expenses.

One of the best things about a budget is that it can give you direction and a goal to aim for. Some budgets are created to secure funding or a business loan, which means they aren’t adjustable and businesses must stick to them.

However, budgets that aren’t being used to claim funding or secure a loan can often be more fluid and flexible, depending on the needs of the business at the time. It’s important to consider what the budget was created for and the rules of any agreements made in light of the budget.

Learn more about the importance of budgeting in this Xero blog

Monitor expenses regularly

Regular expense monitoring helps you determine true profitability and spot costly errors before they impact your bottom line. Most businesses track revenue closely but neglect expense tracking.

Consistent expense monitoring delivers key advantages:

• Accurate profitability: See the real financial health of your business
• Error detection: Catch mistakes before they become major problems
• Better cash flow visibility: Understand exactly where your money goes

A structured expense monitoring process helps you:

• Make better decisions: Base choices on real financial data
• Control spending: Spot overspending before it hurts your business
• Reduce overhead: Identify and eliminate unnecessary costs
• Improve cash flow: Predict and manage money coming in and out

If you have a lot of expenses to keep track of, it can be difficult without a process in place. This is why it’s important to find a tracking system that works for you, whether that’s a spreadsheet or dedicated accounting software.

When implementing a new process, consider how it will be updated and how frequently. Real-time or near real-time tracking is beneficial when it comes to identifying errors, unnecessary costs or overspending before anything detrimental happens and it’s too late to resolve.

Look for cost-saving opportunities

While creating a budget and tracking your expenses show you what you’re spending money on, they can also help you look for cost-saving opportunities. This is important for staying on top of your business costs as it allows you to reduce unnecessary expenditure so that cash can either be saved or reinvested somewhere else in the business.

Here are proven strategies to reduce your business costs.

Negotiate with or change vendors

From stationery to raw materials for your products, negotiating prices with vendors or changing to new providers that offer better deals can be a great way to cut business costs.

Work with a tax professional

A tax professional can not only help you fill in and submit your tax return, they can also help you to save money with tax planning by identifying specific deductions, such as meal and entertainment expenses for up to six such events per year.

Many accountants can help minimize tax and ensure you’re making the most of any deductions you’re eligible for. They can support you with monitoring capital gains tax, maintaining appropriate tax credits, retirement planning and charitable giving, all to save you money on your tax bill.

Reduce energy consumption

Energy prices have been increasing rapidly in recent times, with the Bank of Canada noting recent inflation has been driven in part by increases in energy prices. If you’re unable to change providers for a better deal, it might be worth looking in detail at your energy consumption and finding ways to cut it down.

Optimize your office space

A lot has changed in terms of where and how we work in the last few years. But saving money on your office space isn’t as simple as just moving premises to somewhere else. As an alternative, you could look to make your current storefront or office work harder for you. See if you’re utilizing all the space effectively and try to make savings on utilities or office supplies.

Compare against industry benchmarks

Researching how your competitors are performing and what they are doing can help you to cut business expenses. If they are foregoing an element of their business that you’re paying for and it works for them, you could try the same thing. Benchmarking can help you to compare your profitability too, so bear this in mind when researching what others are doing.

Plan for unexpected costs

Planning for unexpected costs protects your business from financial shocks and prevents you from making desperate cuts to other areas. Unexpected expenses can be huge – from equipment failures to supply cost spikes, which can happen quickly as research shows there is often a complete pass-through of costs from suppliers to their customers during periods of high inflation.

Set aside funds for emergencies by:

• Creating a contingency fund: Allocate 5-10% of your budget for unexpected costs
• Purchasing business insurance: Cover major risks like equipment failure or liability claims
• Building cash reserves: Maintain 3-6 months of operating expenses in reserve. This is a critical step, as recent analysis shows that increased cash holdings are concentrated in just 10 percent of firms, suggesting many businesses may lack sufficient reserves.

Whether it’s equipment failures, rising supply costs, or unexpected expenses from your employees, making sure you’ve got a pot to dip into when the unforeseen happens can help you keep on top of your unexpected business costs.

If you’re not sure you’ll have enough profit each month to set aside as a contingency fund, it’s worth considering purchasing insurance that will help you pay for emergencies.

Take control of your business costs

Effective cost management gives you control over your business finances and helps you make confident decisions in any economic climate.

Key takeaways:

• Start with the basics: Create a budget and monitor expenses regularly
• Look for savings: Negotiate with vendors and reduce energy consumption
• Plan ahead: Set aside funds for unexpected costs
• Use the right tools: Modern accounting software automates expense tracking and provides real-time insights

Cloud-based accounting software can streamline your cost management by automatically categorizing expenses, tracking cash flow, and generating reports. Start a free trial to see how the right tools can simplify your financial management and give you better visibility into your business costs.

FAQs on business cost management

Here are answers to some common questions about managing your business costs.

What are the main types of business costs I should track?

The main types of costs to track are fixed costs (like rent and salaries), which are consistent, and variable costs (like supplies and shipping), which fluctuate with your sales. It’s also wise to keep an eye on one-time or unexpected expenses.

What’s the difference between cost management and cost cutting?

Cost management is a proactive, long-term strategy for controlling expenses to improve efficiency and profitability. Cost cutting, on the other hand, is often a reactive measure to reduce spending quickly, sometimes without considering the long-term impact.

How often should I review and adjust my business costs?

It’s a good practice to review your business costs monthly to stay on top of your spending. A deeper review should be done quarterly or annually to adjust your budget, renegotiate with suppliers, and ensure your cost management strategy still aligns with your business goals.