Among business terms is a frequent mention of the term cost avoidance vs cost savings. At first glance and for the industry outsiders, these terms seem pretty interchangeable. What with the inclusion of cost in both terms and the fact that by avoiding costs actually translates into saving money, the two terms look like synonyms. However, the reality is that these two terms couldn’t be farther than each other. Despite their visual similarities, cost avoidance vs cost savings denote two entirely different concepts used in businesses and both have different methods, uses and ends in a business.
Cost avoidance vs cost savings, as the names would suggest, refer to practices that reduce potential future costs (cost avoidance) and actions that reduce debt or current spending (cost savings). As you might guess, these terms represent two equally different practices with different outcomes. However, cost avoidance vs cost savings are both common practices in the business world: both are used to drive down the running costs and eventually the total budget plus maximizing the profit margin. What you need to know is that both are beneficial and allow for greater control over the overall budgeting of your business.
Now for the basics and the differences,
What is cost avoidance?
Cost avoidance, simply put, is avoiding incurring costs in the future. These include costs of wear-and-tear (for machinery, vehicles etc) and any other costs that would adhere to the age-old adage of ‘a stitch in time saves nine’. Cost avoidance would therefore be a sort of pre-emptive spending, the type that businesses do to ensure costs don’t increase and pile up later on. It is actually a very efficient way of minimizing overall costs of operating equipment and vehicles. Businesses routinely utilize cost avoidance practices to make sure that a machine or a fleet vehicle does not end up costing them more than what a timely maintenance schedule will cost them.
With cost avoidance plans, companies aim to reduce future costs by spending on-time. For example, as many companies switch to fleet vehicles and provide maintenance for the cars, therefore, oil changes and maintenance becomes the top priority when it comes to cost avoidance.
By maintaining a schedule and enforcing proper wear-and-tear instructions, operating costs temporarily indicate a rise but in the overall run, it saves the company money since routine maintenance will ensure that a vehicle runs longer and does not compound problems and costs owing to a lax maintenance schedule. Therefore, corporations and big spenders routinely utilize cost avoidance techniques to make sure that the equipment they have keeps operating on lower cost, because these low payments are what help keep the major expenditures at bay.
Pre-emptive spending can go beyond material things with wear-and-tear. It may also refer to investment techniques and hiring processes, wherein temporary costs are borne to ensure that in the long run, aggregately high costs can be avoided. To explain this point, companies routinely invest in new properties, office locations and technological solutions to ensure their workforce stays on its toes.
By investing, corporations are essentially making a one-time payment (that will temporarily increase spending), thereby making sure that in the long run, costs stay down and no aggravated spending pops up.
Investing is considered a cost avoidance technique by default because it requires a one-time funding and will then actively work to eliminate compensation costs or other depreciation costs over the longer period, thus avoiding incurring additional costs.
Similarly, value-added services can also provide the cost avoidance method that companies look for. If we were to consider the first example, of fleet cars, value added services would mean extended warranties or a certain discount on oil changes from the dealership or anything that they can throw in as an extra.
Cost avoidance would therefore play in a way that by spending upfront and at the initial stages of the process, running costs are lowered and eventually depreciation costs are ruled out and in the long term, costs go down significantly since the proper upkeep and the provision of value-added services would keep things from falling apart or presenting problems that require huge amounts of money.
Also Read: Businesses That Make Money Right Away
And what would cost savings be?
Cost savings refer to the hard savings that a decision can lead to. By hard savings, we mean savings that are tangible, noticeable and a result of a corporate decision that slashes off costs. So, in a way, cost savings can be a process that reduces,
- Debt level
- Current spending / running costs
Cost savings, therefore, are the practices that increase hard savings for a corporation and therefore can be included in the overall financial statements of a corporation, so that the corporation can effectively measures cost-cutting and cost-savings when it comes to profit over the year.
Cost savings, in their most primitive form, would be simply cutting out a non-essential food item from your lunch menu or slashing danishes off the coffee break because nobody likes them. Practices like these result in hard savings i.e. savings that are tangible, immediate and have been undertaken due to a decision by the management. In this instance, if nobody wants salad for lunch and it burns a hole through the foodstuffs budget every day or month, eliminating them from the menu would result in an immediate decrease in running costs and would further minimize running costs or current spending. It’s as banal as that.
However, cost savings are not so much basic in their entirety. These methods go beyond coffees and danishes and can include methods that save millions (for big corporations) as a result of a sweeping decision. Everything from partnerships to contract renewals and negotiations can be made a part of cost savings (if done properly), so as to ensure that the yearly financial statements of a corporation can include these cost saving methods as the real heroes of bringing the running cost down.
Also Read: How Much Savings Should be Invested?
The main difference: cost avoidance vs cost savings
As it has been stated beforehand, the debate between cost avoidance vs cost savings is based on the fact that these two are polar opposites and while may deal with cost control and bringing costs down, both do the same in different manners, thereby contributing to their differences in methods and practices.
Cost avoidance vs cost savings: NOT THE SAME. The end might be the same, but practices vary. Cost avoidance avoids incurring costs related to depreciation and compensation (a stitch in time saves nine) while cost savings are hard savings that culminate from a sweeping decision and result in a quick, tangible saving in running/operating costs. Cost avoidance vs cost savings refer to the practices to save the corporation overall costs and while their names might sound similar, both practices are different.
In a nutshell:
Cost avoidance vs cost savings are business practices that will help cut overall costs down and are not synonyms. Cost avoidance saves money in the long run, cost savings do the same with a short-term effect and period.