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What is Cost Saving? - Definition & Examples

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we will discuss the term cost savings - what it is, and examples that you may come across. Cost savings is an incredibly important concept in business, and it is much more nuanced than one would expect.

Shoe Stores

Imagine you are the CEO of a chain of shoe stores in your hometown and the next few towns over. You've been the CEO since you took over the business from your father 20 years ago. Since then business has been good, but recently there has been increased competition from online shoe retailers. They have been able to undercut even your legendary low prices. Something needs to change. If things do not change you may need to close the business down in 2-3 years. Luckily, you read this lesson and now know what cost savings are, and how the concept can be applied to your business to make noticeable improvements in the company's bottom line (i.e. profit/loss).

In this lesson, we will define the term cost savings and then give several examples that apply to the shoe retailing business but the examples can be extended to many different industries.

Definition

Cost savings, also known as cost reductions or 'hard' cost savings, are savings that directly impact the company's bottom line (i.e. profit/loss). These are the savings you most likely think of when you hear the term cost savings. Examples include switching from expensive color printing to inexpensive black/white or reducing salaries paid by giving employees every other Friday off. These cost savings are easily quantifiable, and as a result they get a great deal of attention because, as the saying goes, 'you can't manage what you can't measure.' Well, you can measure cost savings, and they are managed as a result.

Examples

There are several different ways you may see cost savings in the business world. We'll run through several ways you (as the CEO of the shoe retailing chain), can increase your cost savings.

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