If you want to keep your business on the right track, you must stay alert to the traps that can be fatal. Here are 10 foolproof tips to drive your business to bankruptcy—and how cost management can be the key to avoiding these mistakes and ensuring your company’s survival.
If you’re in manufacturing, focus solely on products; if you’re a service organization, focus exclusively on services. Channels and customers are just consequences, and measuring the cost of serving them is an unnecessary luxury.
Many business owners believe that focusing exclusively on products or services means managing their company efficiently. However, this mindset is a major mistake. Cost management also involves controlling how these products and services impact the company’s overall expenses. Effective cost management integrates all aspects of the business, including channels and customers.
These are costs you’d have anyway, so why bother with back-office expenses or indirect costs generated by operations?
Ignoring indirect operational costs may seem like a practical solution, but it’s one of the surest ways to drive your business to failure. Effective cost management must account for all costs, including overhead, and identify where waste occurs.
Buy low, sell high, and pray. Who needs strategy when you’ve got faith?
If you think gross margin is the only important metric, your business might be in danger. Focusing solely on sales while ignoring cost management can lead to misleading results. Proper cost management considers the total cost of production and operations—not just sales.
Maximize cost allocation through spreads, especially based on revenue or volume. After all, if it works to split a bar tab, why wouldn’t it work for an entire company?
Using spreads as a cost allocation method is a quick way to generate significant errors. Cost management should rely on more precise methods, analyzing activities that truly impact production and services, ensuring accurate cost distribution across the business.
Need more detail? Add another cost center to accounting. KPIs? Waste of time. Focus on selling more, and if costs become an issue, start laying off employees.
Overlooking process and activity management can be a fatal error. Effective cost management requires analyzing the profitability of each process and activity to ensure efficient allocation of capital.
Moreover, layoffs are not a sustainable cost-reduction strategy.
Cost management is just another IT project. Modeling is a minor detail, and all business rules will be defined by the Systems team.
Relying solely on an ERP for cost management is a mistake. Implementing a cost management system requires customization and cannot be entirely delegated to general management software, which often lacks specific functionality to properly track and allocate costs.
Every company has redundant activities, “inevitable rework,” or processes that “have always worked.” Why change something that’s not broken?
Failing to address duplicate tasks and ineffective processes is one of the biggest traps for a business. Cost management must critically assess and eliminate processes that create waste while focusing on those that bring real value.
Don’t create a communication plan. It’s best to keep the cost model hidden in Controllership and surprise everyone with unexpected charges.
Hiding cost models can lead to negative surprises, especially when costs spiral out of control. Good cost management practices include proper planning and transparent communication between departments.
The more detailed the cost model, the better! Tracking millions of activities seems like a great idea: you can always consolidate them later. Precision is key, even if it’s overkill.
While accuracy is essential, excessive detail can shift the focus away from what truly matters. Cost management should strike a balance, avoiding unnecessary complexity.
All that matters is being price-competitive and selling in volume. Whether you make a profit or not is just a minor detail. If the budget gets tight (and it will!), go for another round of funding or consider selling a unit, a product line, or even part of the business.
Growing without considering costs is a critical mistake. Cost management must align with pricing and volume strategies to ensure long-term profitability and protect the company’s financial health.
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