IMPACT OF COST CONTROL AND COST REDUCTION ON PROFITABILITY OF MANUFACTURING COMPANY CASE STUDY OF BLACK-WORTH CONSTRUCTION COMPANY, KWARA STATE
- BACKGROUND TO THE STUDY
A business objective is the starting point for any business organization to thrive and it provides direction for action. It is also a way of measuring the effectiveness or otherwise of the actions taken by the management of the organization. The main goal or objective of any business organization is to make and maximize profit while other secondary objectives include going concern, growth, corporate social responsibility, benefits to employees and so on. Though other objectives are also considered very important as listed above, but profit maximization is usually the ultimate because it maximizes the shareholders wealth which is the ultimate aim of investing in a business. People will naturally prefer to invest in a highly profitable business. Therefore, in the long run only the profit maximizers survive in the business environment.
However, for adequate profit to be recorded from a business there is a need for adequate control of cost. Robert (2007) stated that a company with adequate cost structure possesses the higher chance of attaining its profit target. Prices of goods, raw materials and services are gradually increasing day by day, and due to the fact that the sole aim of a businessman, producer or manufacturer is to make profit they end up making use of low quality materials for production so as to reduce cost of production and maximize profit. Moreover, with the increase of competitors around, most of the producers have thought it wise to manufacture or package a quality product and also enhance their profit level. Cost control/reduction and profitability is the mainstay of every business entity and therefore represents the bottom line for every company. For a firm to be profitable, a clear and thorough understanding of all the factors that drive profit, as well as cost is very important (Adeleke, 2014). Cost control is an important and has always been an important issue but perhaps most important in today’s unpredictable market with few exceptions, at no other time in history has the business market been more dynamic.
Unlike the large scale enterprises, the small and medium scale enterprises (SMES) have been starve by financial needs, poor implementation and monitoring of projects, time and cost overrun, nonpayment of loans and harsh economic conditions. (Adam, 2005). Moreover, one of the most important traits for business success in a recession economy in especially Nigeria is that more and more manufacturing companies had been chased out of market and are thus using cost control and cost reduction as a competitive weapon. However, a business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction both are the activities necessary for ensuring that these objectives are fulfilled. With the current Economy situation of a developing economy such as Nigeria, there is now a cut throat competition from various business concerns of the countries. As a result there is now a race to secure a place for survival. This has increased the importance of Cost Control and Cost Reduction.
Hence it is required to study the different tools and techniques used for the Cost Control and Cost Reduction. For the same we need to start with understanding deeply the concept of cost. Once we understand the meaning of cost, its controllability, main areas where cost arises, then we can think of how to control or reduce the cost. We can classify the cost according to their nature, behavior then we can easily know the cost which can be controlled or reduced. One of the benefits of cost control is the ability of a company to keep cash flow at necessary levels of operations, that is, with cost control, excessive amount of cash are not too tied up in inventory, it prevents over supply of stock or over staffed departments and this keeps cash available for other purposes including navigating economic waves, expansion needs or repairs and maintenance of equipment. Many construction companies use outside assessments to analyse their efficiency including the result of cost control effort, this does not only bring new viewpoints to the process, but also provide important internal review. Sometimes it is difficult to be objective when you deal with management of a business on a day to day basis, but professional analysts can bring a broader scope to operations resulting in improved cost control strategies. This elevated the interest of the researcher to bring to light of how this goal can be achieved through intensive study of the role of cost control and cost reduction on the profitability of manufacturing company in Nigeria.
1.2. STATEMENT OF PROBLEM
In recent years, the cost of products manufactured in Nigeria has been very expensive beyond the reach of common Nigerians. This cost challenges has made many products manufactured in the country unpatronized by the consumers, and as a result of that expires in the hands of the sellers. There is also a problem of poor inventory management which leads to overstocking thereby tying down the company’s working capital. Another problem facing some or most of the manufacturing firm is the installation of improper plan to reduce cost of production so as to maximize profit, i.e. ( making use of low quality raw material). The sole aim of any business organisation is to make profit and most business owners believe that the best way to make profit is to increase sales and this brings up another conundrum. In order to increase sales, there must be a corresponding increase in cost because of the increased amount of work involved. These increased costs are what need to be curtailed.
Also, the exorbitant cost of running business in Nigeria has necessitated the need to focus on cost control and cost reduction as a means of achieving both the primary and secondary objectives of being in business, which include maximisation of profit and shareholder value. Up till now, many companies do not see cost management as a serious issue. No wonder why they frequently complain of low returns to capital employed. The inability to control or reduce cost incurred and attendant effect on profitability has forced some Nigerian firms to relocate their businesses to the neighboring countries, where they assume cost of running business will be relatively cheaper compared to what is happening in Nigeria.