Cost optimization

Cost avoidance vs. savings: What’s best for financial health?

How would your company face a financial storm? Cut costs now, or avoid future expenses? You need to consider these facts first. 

All business faces moments when they need to tighten their belts, and stakeholders must balance between immediate savings and long-term resilience. 

This is called cost avoidance and cost saving. 

Both can help keep finances on track, but take different paths to stability. 

In this article, we’re going to explore these two strategies. 

We’ll explore what they are, look at some examples, see how they differ, and consider the pros and cons of each. 

You’ll end with a strong understanding of both and a clearer way forward. 

Let’s find the right approach for your business. 

Hard costs vs. soft costs

In procurement, you’ll come across both hard and soft costs. 

They both play crucial roles when it comes to understanding your spending.

But what are they exactly? 

Hard costs

Hard costs are direct and tangible expenses. 

They are typically:

  • Physical assets or resources 
  • Easy to quantify
  • Show up clearly in your financial statements

They are costs you can directly pinpoint. For example, the purchase price of equipment, raw materials, inventory, or assets are all hard sots. 

Hard costs also align well with saving strategies. 

Since they’re measurable, you can directly reduce them by negotiating better supplier rates, buying in bulk, or optimizing your processes. 

Soft costs

Soft costs on the other hand are indirect and intangible expenses. 

They usually:

  • Don’t appear as clearly in financial statements
  • Are often tied to services or non-physical aspects of a purchase

Typical soft costs include legal fees, ongoing maintenance, employee training, or consulting. They’re crucial but can be much harder to track.

They are often managed through cost avoidance. 

By investing in preventive maintenance, securing long-term service agreements, or training employees, you’re taking steps to avoid higher future costs.

What is cost avoidance?

Cost avoidance is a proactive strategy to help you prevent additional costs further down the line.

You minimize potential increases by getting ahead. 

The core element is taking preventive action, such as investing in maintenance, negotiating fixed supplier rates, or building a skilled workforce. This helps you avoid bigger expenses later on. 

Because cost avoidance tackles future costs, it doesn’t always show up in financial statements. It plays a powerful role however in keeping finances stable and predictable over the long term. An essential aspect of cost avoidance is maintaining procurement visibility, which allows you to monitor and manage potential expenditures before they become actual costs.

Examples of cost avoidance

  • Preventive maintenance. Regularly servicing equipment helps you avoid costly breakdowns or replacements. Skipping maintenance now may mean much bigger bills down the road.
  • Supplier price locking. Lock in today’s prices with suppliers to avoid unexpected price hikes. Fixed pricing gives you cost stability and predictability.
  • Employee training. Invest in training now to avoid costly errors later. A well-trained team is less likely to make mistakes that lead to expensive rework.
  • Upgrading technology. New tech can help you prevent inefficiencies, saving you from costly overhauls or bottlenecks in the future. Implementing procurement software can streamline your purchasing processes, reduce manual errors, and help avoid unnecessary costs in the future.

What is cost savings?

Cost savings, on the other hand, is about reducing your current expenses right now.

You lower spending within your existing budget, targeting measurable financial benefits.

You’ll see it reflected directly in your financial statements, boosting cash flow and strengthening profit margins.

Examples of cost savings

  • Negotiating supplier contracts. Work with suppliers to secure discounts and lower rates. You can typically negotiate on contracts to help bring down costs.
  • Bulk purchasing. Bulk buying is a surefire way to bring down the cost per unit. It’s especially useful for a product you frequently use. 
  • Process optimization. Streamlining your workflows helps eliminate unnecessary resource use. 

By refining your processes, you’ll save on time and materials. For small and medium-sized businesses, utilizing specialized procurement tools for SMBs can significantly enhance efficiency and lead to substantial cost savings.

What’s the difference between cost savings and cost avoidance?

Cost savings and cost avoidance are two sides of the same coin when it comes to financial strategy. 

They both aim to reduce expenses, but they take very different paths to get there. 

Knowing when to use each can help you make sharper, more strategic choices in finance and procurement.

Core differences explained

Approach (proactive vs. reactive)

Cost avoidance is all about being proactive. You’re looking ahead, planning, and putting measures in place now to avoid costs that could come back to bite you later. 

Think of it as “future-proofing” your budget.

And what about cost savings? That’s reactive. 

It’s about taking action right here, right now, to trim what you’re already spending. You’re cutting costs in real time, improving your bottom line instantly.

Financial impact and reporting

Cost savings have an immediate impact. You’ll see it right there in your financial statements, boosting cash flow and profit margins. It’s tangible, visible, and easy to track.

Cost avoidance, though, is a little different. It doesn’t show up directly in financial statements. 

You won’t see a line item for “expenses we avoided.” But its power lies in keeping things stable for the long haul, shielding you from costs that might otherwise throw off your future budgets.

Types of costs addressed (direct vs. indirect)

Cost savings go after direct, hard costs you can measure. Lowering material expenses, and negotiating better deals, are concrete, immediate savings.

Cost avoidance tackles indirect or “soft” costs, like maintenance or risk management. These actions might feel less immediate, but they prevent bigger costs down the road. Let’s look at a short comparison table:

Cost savings Cost avoidance
Reactive (current expenses) Proactive (future expenses)
Directly recorded in statements Not directly visible in statements
Immediate cash flow improvement Long-term cost prevention
Supplier discounts, bulk purchasing Preventive maintenance, price locking
Hard/tangible costs Often soft/intangible costs

Strategic considerations: When to use each

When to use cost savings

Cost savings is your go-to for quick financial wins. 

If you need cash flow relief now or want to give profit margins a lift, this is where you focus. 

Renegotiate supplier rates, cut down on waste, and streamline processes – these moves make an instant impact.

When to use cost avoidance

Cost avoidance is your long game. Use it when you want to prepare for future risks or protect against unpredictable costs. 

Lock in supplier rates, invest in preventive maintenance, and set up safeguards. You’re building resilience, and keeping things smooth for the future.

Using both for a balanced strategy

When you use cost savings and cost avoidance together, you’re creating a solid, balanced approach. 

Cost savings give you that immediate boost, while cost avoidance strengthens your financial foundation over time. 

Together, they help you stay lean now and secure for what’s next, setting you up for long-term success.

What are the pros of cost avoidance?

Pro 1: Increases your profit 

Cost avoidance is all about preventative measures. You eliminate future expenses by acting now. 

Rather than being reactive, you’re being proactive. As such, you won’t be scrambling for extra money further down the line to rectify something gone wrong. 

You’re spending less now than you would if you left it. 

Example: Say you’re a software company and see that some of your server infrastructure is nearing full capacity. Rather than waiting for an outage, you act now and invest in upgrading the infrastructure. You’re improving today, to prevent issues later on, and saving on future costs. 

Pro 2: Streamlines your operations

Cost avoidance helps you free up future resources by preventing expenses that would arise further down the line. It allows you to focus on higher-priority tasks and prevents you from being pulled into reactive fixes.

This streamlines your operations by eliminating unnecessary processes, tools, or tasks. As such, it reduces complexity, allowing you and your team to stay focussed on what needs to be done. 

Example: Imagine in your company you notice your team is using some outdated tools. They’re barely being used and eating into your budget. Rather than simply, making do, you decided to replace them with a single platform that does the same work as all of them. As a result, your team can focus on one platform rather than juggling. This improves efficiency and focus. 

Pro 3: Risk mitigation 

It’s better to put out a small fire now than a huge blazing one later. That’s essentially what risk mitigation is. You spot potential issues now and fix them to prevent larger and unexpected issues later.  This also saves from future business disruptions and costly repairs. 

Example: Say in your company you start to notice that the laptops you provided your staff are starting to get a bit old. You’ve heard a few grumbles about slow performance. Rather than waiting for them to break, you invest in new equipment now. By doing this you improve productivity and prevent future disruption that could have halted work altogether. 

What are the cons of cost avoidance? 

Con 1: Difficult to measure

Cost avoidance saves money in the future but it’s hard to track. The money saved doesn’t appear in financial statements the same way “soft savings” do. 

So while the savings are real, it can be difficult to prove the exact impact they’re having. It’s almost like having an invisible win, it’s real and valuable, just hard to see. 

Example: Say you’re a company that invests regularly in software updates. This helps prevent any future breakdowns, however, immediate savings aren’t obvious. It’s clear it’s a smart investment, but trying to prove the financial benefit can be tricky. 

Con 2: Increase short-term costs

With cost avoidance, there can sometimes be a need for an initial higher upfront cost. It’s typical for preventative measures to have an impact on short-term budgets. 

It can be a trade-off, but by spending now you’re avoiding bigger costs later.  It’s the proactive choice for longer-term savings. 

Example: Imagine you’re a tech company and decide to upgrade your security software preemptively. This decision adds to your current quarter’s budget and results in a short-term cost increase.

Con 3: Delayed impact

Cost avoidance is all about the long-term benefits. This is good for future “you”, but for the “you” in the here and now, it can sometimes feel frustrating. 

When you have to deal with stakeholders, they can prove tricky to manage. They want fast results, but you have to explain that this is better for the long term. 

This can contrast directly with direct savings, where the proof is instant.   

Example: You’re a tech company that has decided to invest in automated testing tools for software development. There’s a steep upfront cost but you know it will help prevent costly bugs later on. When trying to get approval, the stakeholders are questioning whether this cost is truly worth it. 

What are the pros of cost savings? 

Pro 1: Immediate financial impact

With cost saving, you get a quick financial boost that directly improves your bottom line. Since with cost saving, you cut costs immediately this increases your cash flow right away. 

This frees up your money to be directed into other beneficial projects such as towards growth or for urgent needs. Essentially, it strengthens your financial stability from day one. 

Example: Let’s say you’re a tech startup with high cloud costs. In order to bring these costs down you speak to the provider and negotiate lower rates. The immediate frees up extra money that can be funneled into other areas of the business. 

Pro 2: Market competitiveness

Cost savings reduce your operational expenses by cutting down on regular operations costs, such as software licenses. Since operations costs are now lower within the company, the company is able to lower the product of product or service, while maintaining the same high quality. 

This in turn can attract new customers, retain your current customers, and increase your market share. 

Example: Imagine you work in a tech firm that switches its software licensing to one more cost-effective. The savings you make can be passed on to customers by avoiding price rises. This ensures you offer the same valuable service and please customers without sacrificing the quality of what you provide. 

Pro 3: Investment opportunities

Cost savings can free up extra money that can be used to reinvest in the company. By reinvesting you’re putting more back in to get more out. For example, you could use the extra funds for growth initiatives, tech upgrades, or further team development. 

This helps to strengthen your company’s position and fuels innovation. 

Example: You’re a software company that decides to combine tools your team uses to help cut your licensing fee. The money you’ve saved you used to hire a developer. This developer helps expand product features and allows you to enter new markets. This reinvestment boosts your growth and keeps your offerings competitive. 

What are the cons of cost savings? 

Con 1: Potential impact on quality

With cost savings, one of the biggest downsides you’re at risk of is cutting too aggressively. By doing so you put at stake the quality of what you provide. 

And if the quality becomes noticeable this can lead to unhappy customers and damage sales as well as your reputation. 

Example: You’re a software company that decided to cut down on your customer support. This results in slower responses and bad communication. Customers who require your help will become frustrated causing them to leave and not use your service again. They may also leave bad reviews. 

Con 2: Negative impact on employee morale

As part of your cost-saving strategy, you may decide to cut back on staff. Yes, this can save money, but have you considered the impact on staff morale? 

People are laid off which creates a negative atmosphere. Resources also become stretched and employees start to feel undervalued. 

Motivation reaches an all-time low, with decreased productivity and high staff turnover. 

Example: A SaaS company cuts its budget and as a result decides to cut down on the staff in its marketing department. There is now only one manager and one staff member. They start to feel overworked and undervalued, trying to do the job of a whole team before. Eventually, they hand their notice in and you have to replace staff. 

Con 3: Diminished innovation

If you go in a bit too heavy with your cost saving it can act as a blocker to innovation and stifle creativity. 

As resources are depleted, it leaves less room for new ideas to prosper. Your team’s ability to innovate and stay competitive is reduced and you start to notice you’re falling behind your competitors. 

Example:  Your software company decides to cut back on its research and development to save costs. As a result, your team’s not able to experiment with new features anymore such as AI-powered tools. Eventually, your products look dated and take longer to build, falling behind your competitors. 

Takeaways

Choosing between cost avoidance and cost savings isn’t just a financial decision—it’s about setting up your business for resilience and growth. Here’s what to keep in mind:

  1. Cost avoidance is future-proofing. It won’t show up in your financial statements, but it shields you from expenses that could hit harder down the line.
  2. Cost savings boosts cash flow now. Immediate reductions improve your bottom line and make a tangible impact.
  3. Hard costs are easier to cut. Physical and measurable, they align well with cost-saving actions.
  4. Soft costs need cost avoidance. Often hidden, expenses like training and maintenance avoid future issues but aren’t as easy to track.
  5. Timing matters. Use cost savings for immediate results and cost avoidance to prevent future disruptions.
  6. Each approach has trade-offs. Cost savings can impact quality if overdone, while cost avoidance requires upfront spending.
  7. A balanced approach works best. Cost savings give quick wins; cost avoidance secures long-term stability.

Ultimately, combining both strategies helps you stay financially lean now while preparing for what’s next.

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