Cost Savings, Cost Reduction & Cost Avoidance: What’s the Difference?

Last updated October 8, 2020 written by Tetiana

These are three terms that you may come across when running your business; cost savings, cost reduction, and cost avoidance. What are the differences between cost avoidance vs cost savings and cost reduction? It’s easy to assume that all of these terms actually mean the same thing, but this is not the case. In business terms, these all have slightly different definitions. We’ve discussed what these terms mean in this guide to help you to fully understand, and even decide on the approach your business should take.

cost avoidance vs cost savings

Understanding Hard and Soft Costs

Hard costs and soft costs may sound like jargon. In fact, there are some major differences between them which you should try to understand before exploring the differences in cost saving vs cost reduction.

Hard costs relate to assets, which are often physical. Things like your office space, new equipment, the stock and inventory you need to hold, these are all hard assets. They're easy to work out and to estimate and can be used in business plans and accounting more easily than soft costs.

Soft costs don't often have a tangible financial benefit, but they are there. These costs can be referred to as indirect costs. Things like legal costs, unexpected bills or other unforecastable business expenses. What this means is that making a saving in this way (or avoiding or reducing a soft cost) is a hard thing to measure. Better health and safety may reduce soft costs in the future, such as compensation or repairs, but you can't measure an event that you've avoided happening.

Cost Avoidance - A Focus on Future Costs

This is a strategy that requires you to play the long game. The definition of cost avoidance versus cost savings is that avoidance is related to the potential expenses you might experience in the future. Implementing cost avoidance measures is all about considering what costs could be coming down the pipeline.

The strategies used to make this saving to the bottom line of the business can come in many forms. They might not even have directly obvious financial benefits in the short term. For instance, training an existing member of staff can be a way to avoid the future cost of recruitment for a position. If recruiting for a role is specialist then it might just make sense to train the staff you already have. This can save the costs of advertising and the time cost of potentially employing someone new.

Setting up services and relationships with companies that are scaleable can be a way to avoid a big, unwanted bill coming your way in the future. For instance, at Nexa, you can set up a Nexa Go plan where you only pay for the minutes you use. This can avoid you having to employ a full-time receptionist in the future when you aren't quite ready to fill their 40-hour working week, and would end up spending money unnecessarily.

Even some of the so-called "smaller" aspects of your business and your operational costs can quickly stack up. Examples of cost avoidance include company phones that are on a contract that allows for a potential increase in prices. It's easy to overlook this and let the costs creep up in the future. You can avoid this by agreeing regular updates to the costs or a fixed-price that will not increase. Other price increase examples include suppliers who might creep their price up over time. It's easy to ignore a supplier's price crease or assume it is inevitable, but you might be able to avoid it. An example of cost avoidance would be locking in a long-term deal with them, to ensure that added costs can't be bolted on.

These might be deemed as "soft savings". You can't always measure the avoided cost and the results of these measures it can be all-too-easy to ignore. However, most would agree that this long-term focus is vital.

Cost Savings and The Difference Between Cost Avoidance vs Cost Savings

You may also hear of these sorts of savings as "hard savings" as they can be measured more easily and implemented quickly, this is one of the key differences when considering cost savings vs cost avoidance measures. Anything to lower current spending, which can be measured, and which doesn't have a negative impact on your business can be seen as a cost saving. The key is that your business needs to function in the same way with no negative impacts of a new, lower price.

As an example, cutting staff may not be a cost saving or an example of hard savings, because you may not be able to create the same product or provide the same service. However, outsourcing your reception staff or employing a virtual assistant might be a way to cut costs while still providing the same service.

Examples of costs you may be able to cut include:

  • Renegotiating your utilities.
  • Using freelancers or contract labor such as a live answering service.
  • Pooling your resources with related businesses. Office space is an example.
  • Buying in bulk (when it makes sense to do so).

Cost Reduction - Making Cuts

A cost reduction is usually a way of saying that you are making cuts to your business, regardless of whether or not you will be able to provide the same level of service. For example, a retail store might decide that they are going to cut their staff and rely on fewer employees to man the store. This will almost inevitably lead to worse service, or longer waiting times, but it is a cost reduction and might be necessary.

Cost reduction efforts can relate to hard savings and soft savings. Maybe your business is going to cut insurance costs in exchange for a lower level of cover. Perhaps you are going to cut the quality of materials you use and go with a cheaper supplier, or a cheaper alternative from the same supplier. These reductions all represent cuts in some way, and though they have cost savings they might also hinder the business.

Conclusion

Once you get a grasp of cost avoidance vs cost savings and cost saving vs cost reduction, you can fully understand which might be suitable for your business. Usually, you will be looking to make savings in a way that doesn't impact your bottom line in terms of what your service or product offers, but can provide you with some financial benefits. Most businesses can cut costs somewhere, but those that want to survive need to do so in a way that doesn't impact upon what they offer their partners and customers.

Frequently Asked Questions

What Are Hard and Soft Savings?

Hard savings are seen by most companies as those savings that you can assign a dollar value to. There is no abstract thinking or conjecture, if you have negotiated a 20% discount with a supplier, you are saving that amount of money as a hard saving. Soft savings are things like potential costs that have been avoided. Hard to measure, but they do represent potential savings. An avoided lawsuit by implementing better health and safety would be an example.

How Can I Avoid Staff Costs With No Cuts?

Offering the same service without spending the same amount can be hard for a business. Outsourcing can be a good solution. For instance, with Nexa, you can switch to call answering services where you only pay for the minutes you use the receptionist’s services. This way, you aren’t wasting money on staff who aren’t being properly utilized.

How Can I Cut Procurement Costs?

Most businesses need to buy some supplies, whether this is a part of what they sell or just office supplies. To cut procurement costs, there are a few basic tips.

  • Never be afraid to negotiate. Many companies would rather lower their price than lose your custom.
  • Shop around, there might be a better deal elsewhere.
  • Only buy what you need. Excess stock can be the equivalent of burning money in a business.
Top