Ever wonder how a company tracks costs in a business? Are there costs that are not necessarily a payment or money transaction? How can it be tracked and reduced?

In business and in everything we do in life, when an investment is made we always look for something in return. This does not always mean money or expense and revenue returns, but can also be in the form of time, effort and energy which can also be measured and converted into dollar value expenses. For instance, an employee would receive wages in turn for their time and effort. To shed some light on some of the expenses, the following are some examples and definitions:

1)      Transaction Costs: This cost can be divided into three very broad categories.

Search and information cost
Bargaining costs
Policing and enforcement costs

(For example, the buyer of a used car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car’s condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.)

2)       Opportunity Costs: This is the cost related to the value you are giving up by using your resources for one option over another option.

3)      Sunk Costs: These are the costs that you have already paid and are perhaps the most misunderstood of all costs. The money you have already spent is irrelevant in determining the value of continuing a project. They are gone no matter what. What matters is the amount it will still cost to finish a project.

4)      Cost Avoidance & Cost Reduction: Continuous improvement works to lower costs in two ways. First, it actually reduces costs on an existing expense—it lowers the price of inventory, cuts floor space, or frees up employees.

5)      Tangible Costs & Intangible Costs: Tangible costs are the ones that you can measure—time, money, kilowatts, etc. Intangible costs are the ones that can’t be easily measured—trust, job satisfaction, morale, etc.

A good example of these aforementioned costs is recruitment of new employees. The process of hiring new staff is not only wages/salary, but there are a lot of other costs incurred in this strenuous task, some are dollar value (payments) and then there are some transaction costs. Here are the costs involved in doing this:

Attraction or advertisement – a company would either hire or advertise in local media.
Time and Effort – time taken to undergo background checks resume revision etc.
Basic Salaries – wages/salaries paid to selected employee
Space – Allocating space for in-house employee. Space per cubic feet of the building
Benefits – Pension, life/health insurance, entertainment, travelling etc.
Employment taxes – statutory payments such as payroll taxes NIS, health, education etc. in accordance with local legislation.
Equipment – Computer, stationery, electricity etc.

These costs all add to a substantial amount and companies are moving towards new innovative ways of managing expenses while increasing production and sales. One of the most popular ways that can this is being done is that of outsourcing.

Outsourcing is a growing industry that has created very innovative ways to assist its clients in every aspect of operating a business. For instance, company A hires a payroll clerk and its competitor company B outsources all its payroll duties. The payroll clerk hired by company A is properly trained internally, but resigns due to better opportunity forthcoming just before the payroll deadline. Company B has been assured an accurate payroll bound by a legal contract while company A has found themselves in a bit of a debacle.

This is not only limited to having your payroll done accurately and timely, but also saves Company B Employment taxes, space, benefits, equipment, salaries, advertising and most importantly time & effort. The time taken for company A to source, check, hire and train their recruit was used by company B to concentrate on its core functions and developed strategies to increase market share and revenue. Outsourcing has given Company B a definitive advantage over its competitor.