Cost Avoidance vs.
Cost Savings
What’s The Difference?
Introduction In keeping any business operational, taking necessary actions to keep the costs down and curbing expenses can prove to be very important. The more sourcing agents can keep the revenue and subsequent cash flow in an upward motion, the better the organization’s profits become. Since “cost savings” and “cost avoidance” mean two different things, understanding this particular difference can improve the overall functioning of business operations. Now let’s break these ideas down further for better understanding.
Cost Avoidance Cost avoidance can help in reducing future costs in all the actions that are continuously taken. Failure in addressing the maintenance issues and not keeping every process in good working order would lead to more expensive replacements/repairs in the future. Any action taken by the sourcing consultants that is preemptive towards the possible avoidance of prospective costs that can be incurred in the future can be treated as cost avoidance. It is not something tangible and can be seen/measured in any organization’s financial/budgeting statements.
Cost Avoidance Since cost avoidance measures can require the organization to spend money as an additional cost, which is temporary and in the short run, the expenses incurred may appear to be elevated. However, such additional amounts of money can now serve to lower the operational costs in the future, they ultimately help in bringing the total costs down. Investing in newer technology helps in eliminating extra spending on compensation costs both now and in the future. Looking for the value-added services provided by the suppliers with the help of sourcing agents can also help in this aspect. Such services are available at very little/no cost to the businesses, but provide help to the concerned in the long run.
Cost Savings Unlike the processes involved in cost avoidance, the results of cost savings are clearly reflected in company budget/financial statements. Cost savings are associated with the actions that reduce current spending, debt levels, or investment. An organization’s statements should always focus upon any savings that have been achieved through planned cost savings, and make it a part of budgeting. Cost savings as compared to the previous periods should be added to financial statements. This helps towards the effective measurement of cost savings with regards to the profit across the financial year.
Examples of Cost Savings 1
s p i h s r Partne
New Con tracts/ Contrac t Renew als
Price s n o i t a i Negot
Partnerships: They can help companies reduce the costs incurred. New Contracts/Contract Renewals: Each time any contract gets negotiated or renewed, there remains a potential for future cost savings. It can come from reduced overall price for longer contracts or from value-added services. Procurement agents can negotiate effectively with potential vendors to receive the best possible deal. Price Negotiations: Procurement agents can lower current expenditure with lower new pricing, by negotiating with the vendor while buying the same product in a larger volume.
Conclusion Therefore, to sum it all up, cost avoidance by sourcing consultants means not needing to spend too much money in the posterity. Cost savings, on the other hand, is reflective of the money that did not have to be spent on something at the present moment.
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