Into The Lender's Mind #14 Cost Control vs. Cost Understanding

A business is a pure strategy game. Always watch your move.

Every founder I meet wants to “control costs.”
Fewer talk about understanding them.

That’s the difference between a short-term fix and a financeable business.

Why lenders care

When a lender reads your P&L, they don’t look for how low your costs are but for how predictable they are.

Predictable = financeable.
Volatile = risky.

Most owners can’t explain their cost structure beyond “materials, labour, overheads.”
But for a lender, the real story lives underneath:

• What portion of your costs move with revenue?

• What portion stay flat no matter what?

• And how does that blend behave when you grow 20% or shrink 10%?

If you don’t know, your lender assumes the worst.

Cost control = defensive

You cut, delay, or freeze.
Useful in a crisis, but temporary.

Cost understanding = strategic

You know the moving parts — and how they scale.
That’s what gets credit confidence

Step 1: Classify before you cut

Split costs into three buckets:

Once you’ve done this, calculate your Operating Leverage:

% change in EBIT ÷ % change in sales.
It tells you how your cost base reacts to growth or contraction.

A lower ratio = more flexibility = lower lender risk.

Step 2: Build your “Cost Bridge”

Just like an EBITDA bridge, but focusing on movement drivers:

Last year’s total cost → + Volume change → + Price/mix effect → + Inflation → – Efficiency gains → = Current total

One page.
Visual.
Lenders love it because it shows control and awareness.

Step 3: Link costs to productivity

Especially in manufacturing, costs without context mean nothing.

• Labour: cost per productive hour, not per head.

• Energy: cost per unit output.

• Materials: yield % and scrap %.

• Maintenance: downtime hours vs spend.

If your maintenance cost went up 8% but downtime dropped 20%, that’s not a problem, it’s performance.

Step 4: Watch for cost drift

Creeping overheads are a silent killer.
Run a 12-month trailing chart of:

• Wages/sales %

• Energy/sales %

• Admin/sales %

If the line trends up while sales are flat, your margins are bleeding quietly.
Lenders spot it before you do, usually at renewal time.

Case example

A £6m-turnover fabrication company had margin compression from 27% → 23%.
Initial instinct: “cut labour.”

Instead, we mapped costs:

• Materials +7% (supplier price + FX shift)

• Energy +18% (contract expired)

• Overtime hours +12% (planning inefficiency)

No layoffs, just switched supplier, hedged energy, fixed scheduling.
Three months later:

• Gross margin back to 27.6%

• DSCR +0.18

• Lender approved +£250k term top-up for machinery expansion.

That’s not “cost cutting.” That’s cost understanding.

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Why it matters

Lenders don’t reward austerity.
They reward predictability and decision logic.
When your cost structure is mapped and explained, it becomes a credit asset.

The hidden benefit?
Once you truly understand your cost base, you also understand your scalability.

15-Minute Audit

1️. Export 12 months of P&L.
2️. Categorise costs as fixed / semi / variable.
3️. Express each as % of sales; spot drift.
4️. Build a cost bridge vs last year.
5️. Identify one “leverage risk” (cost that doesn’t scale).

Remember:
Control is temporary.
Understanding is bankable.

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