Unlike a consolidated company, a startup has limited resources and less room for error to make financial errors.
In this sense, understanding the different types of costs and how they affect a company's profitability is essential for making decisions that drive growth and ensure sustainability.
In this article, we analyze how to manage the costs of products or services in different types of companies and their role in decision-making.
In a startup, cost management becomes critical due to limited resources and the need to be profitable quickly. By understanding and managing costs, a startup can reduce wasted resources, optimize its cash flow and position itself better in the market. This cost control is vital to avoid financial problems and ensure a solid base for growth.
But... what do you mean by costs in a company?
The word “Costs” in a company refers to the total economic resources needed to produce a good or service that will then be delivered to the customer. These costs not only include materials and labor, but also other factors that may vary depending on the type of company: commercial, industrial or service.
Each type of company faces different needs and challenges in managing its costs. Broadly speaking, we can distinguish between three main types:
Trading companies
Commercial companies do not produce their own goods; their main activity consists of buying and selling products purchased from other manufacturers or suppliers. In this case, the product cost is based on the purchase price from the supplier, in addition to other costs necessary to place the product in the hands of the customer, such as:
- Purchase costs: They include the price of the goods purchased, as well as additional expenses, such as transportation and taxes or duties if products are purchased abroad.
- Storage costs: Expenses associated with maintaining inventory, including rental and warehouse management.
- Sales costs: These include marketing expenses, sales staff salaries and, in some cases, point of sale rentals.
- General and administrative costs: General expenses to maintain the company's daily routine, such as administration salaries, technology and equipment amortization, among others.
- Financial costs: Interest and fees on loans or credits used to finance business operations.
Industrial companies
Industrial companies are characterized by manufacturing their own products, which implies a more complex cost structure that includes, in addition to those mentioned above, production costs, including mainly:
- Costs of raw materials: Expenses associated with the basic materials needed for manufacturing.
- Transformation costs: Expenses that convert raw materials into final products, including salaries of production workers, machinery and energy consumption.
Service Companies
These types of companies are dedicated to offering intangible services and, therefore, do not require inventories or product storage. Its cost structure includes:
- Costs of providing services: Expenses related to service personnel, software, communication equipment, and other resources needed to provide the service.
- Sales, general and administrative, and financial costs: Similar to those of commercial and industrial companies, aimed at attracting customers and managing company operations.
How are costs classified in a company?
A correct classification of costs is essential for good financial management in startups and SMEs. Among these classifications, we can mention the following:
Depending on their accounting nature:
- Direct costs: Those that can be directly assigned to the product, such as raw materials or the salary of workers in a specific production line.
- Indirect costs: Costs such as rent, energy or administration, which cannot be directly associated with a single product. To facilitate their calculation, indirect costs can be divided between different cost centers, according to the time and resources that have been dedicated to the product.
Depending on behavior versus level of activity:
- Fixed costs: They remain constant regardless of the level of production or activity (example: office rental).
- Variable costs: They change in direct proportion to the level of activity or production (example: raw materials).
- Semivariable or mixed costs: They have a fixed part and a variable part (example: electricity bill with a fixed base cost and variable consumption).
Depending on the relationship with the product or service:
- Operating costs: Directly related to the daily operation of the business (example: salaries of production employees).
- Non-operating costs: Derived from activities that are not part of the core business (example: interest on loans).
Depending on the behavior your need:
- Non-discretionary costs: Essential for the safe operation of the company, compliance with the law and specific regulations. They cannot be omitted without jeopardizing the integrity of operations, employees, customers and the company as a whole.
- Discretionary costs: Those that are not essential for safety and regulatory compliance, but that can contribute to the improvement of the operation, the quality of the product or service, the customer experience, or the growth of the business. They can be adjusted, postponed, or eliminated without compromising safety or regulatory compliance.
According to their ability to be controlled:
- Controllable costs: Those that can be managed and modified by the company in the short term (example: advertising costs).
- Uncontrollable costs: They escape the company's direct control (example: government taxes).
Depending on the temporary impact:
- Current Costs (OPEX): Associated with activities in the current period (example: salaries for the month).
- Capital costs (capex): Related to long-term investments (example: purchase of machinery).
What are cost centers in a company and what are they for?
The division of the company into cost centers refers to a financial and accounting management methodology that segments the company into different units or functional areas, called “cost centers”. Each cost center represents a specific part of the company where resources are generated or consumed, and its objective is to facilitate the analysis, control and allocation of costs. Dividing the company into cost centers makes it easier to calculate profitability. Cost centers can include production, administration, and sales areas. With this methodology, a startup can calculate the amount of resources that each cost center uses for a particular product, improving the accuracy of the calculation and optimizing profitability.
Key features of cost centers:
- Identifying functional areas: Each center corresponds to a key activity, department, or process of the company (example: production, sales, administration).
- Financial Responsibility: Specific costs are assigned to each center, making it possible to evaluate their economic performance and their impact on overall profitability.
- Facilitated decision-making: It helps identify inefficiencies or areas with high resource consumption, allowing informed decisions to be made to optimize their use.
Common types of cost centers:
- Functional cost centers: Departments that perform specific functions, such as production, sales, or marketing.
- Geographic cost centers: Location-based segmentation, useful for companies with operations in different regions.
- Project cost centers: Assigned to temporary or specific initiatives, such as the development of a new product.
- Service cost centers: Areas that do not directly generate income, but support other centers (example: human resources or IT).
Advantages of dividing the company into cost centers:
- Detailed control: It allows us to analyze how resources are being used in each area.
- Accurate profitability calculation: Identify which cost centers are more efficient or profitable.
- Efficient resource allocation: It facilitates the redistribution of resources to more productive areas.
- Increased accountability: Each department is responsible for its costs, promoting more conscious management.
Practical example:
A software company can be divided into the following cost centers:
- Product Development: Programming costs, software licenses, developer salaries.
- Marketing: Costs of advertising, graphic design, promotional events.
- Sales: Seller commissions, travel expenses.
- Administration: Salaries of administrative staff, office rental.
This division makes it easy to analyze how these areas contribute to the total cost of the product, identifying opportunities for improvement or savings. Reducing costs is essential to improve the profitability of a startup or SME without affecting the quality of the product or service. Some strategies include:
- Negotiation with suppliers: Achieving volume discounts or more favorable payment terms helps reduce purchase costs.
- Optimizing resource use: Maximizing staff and equipment efficiency reduces production or service delivery costs.
- Reduction of fixed costs: Outsourcing services or sharing workspaces can be an option to reduce fixed expenses in the early stages.
- Process automation: Implementing software or technology for repetitive tasks can reduce long-term operating costs.
Managing costs as a key to business success
Efficient cost management is not just an accounting task, but a strategic pillar to ensure the sustainability and growth of any company, especially in startups and SMEs where resources are limited and each decision has a significant impact.
Understanding the different categories of costs, their behavior and their impact on operations allows entrepreneurs to make informed decisions that optimize resources and improve profitability. Tools such as the division into cost centers, the analysis of the break-even point and the implementation of cost-reduction strategies are essential to identify opportunities for improvement and minimize waste.
Finally, effective cost management should not only focus on reduction, but on finding the balance between investing in what is essential, controlling expenses and maintaining the quality of the product or service. In doing so, companies not only survive, but they also create solid foundations to compete, innovate and grow in increasingly demanding markets.
In an environment where every euro counts, managing costs with precision and strategy is the difference between success and failure.
