Good cost management is fundamental to the growth of any organization that wants to keep up in a market that´s getting more and more competitive.
No matter how big or what kind of business you have, forecasting, knowing and controlling your company´s costs is essential to the management process. We´ll give you a better idea of what efficient cost management means and what you should do to achieve it, as well as the errors that you can and should avoid.
Definition of cost management
Cost management is a process that seeks to understand in detail all the costs and expenses related to the production process and revenue earning for a given company.
Efficient cost management is the rational use of these resources in an intelligent manner. In other words, it’s conducting this process while maintaining the quality of your products and services.
Basic concepts of cost management
To put efficient cost management into practice, you need to first understand the difference between the two main components of this process: costs and expenses. In manufacturing firms, costs are those components that are used in the production process, such as raw materials, labor, and the indirect costs of manufacturing represented by rent, electricity, water, and wages among others.
Expenses on the other hand are monetary values consumed in obtaining revenues that are not directly related to the production process, such as administrative salaries and the money spent on sales and advertising.
Fixed and variable costs
Another important distinction is the difference between fixed and variable costs. This distinction is necessary so that we can determine the difference between the costs that are not related to the production process which will exist even if there are no revenues, such as rent and administrative salaries, and costs that are related to the size of a company´s production such as raw materials, other materials and labor (in the case of manufacturers).
These classifications are important so that the sales price can be defined in the most precise manner possible, taking into account not just the values that are directly associated with products or services, but also those that are necessary to maintain the company itself. If these classifications are not made, prices may not be defined correctly and the company may run into difficulties because it’s actually selling its products below cost.
Efficient cost management
For cost management to be efficient, one has to understand not only how costs behave, but also how to use reports and distinct analyses to display product and service costs per distribution channel and client. This includes a view of the production and non-production processes involved, which will include a broader view of administrative costs, which have grown in importance in recent years.
We should also take into account the small errors and deviations that can occur during the production process which can affect the final values for products and services to a significant extent. Ignoring the cost of support areas or using simple cost assignments based purely on production quantities or revenues can also result in important distortions in the calculation of the costs of these products and services.
Advantages of cost management
Good management goes beyond focusing only on increasing profit because, depending on the progress of the economic scenario, reducing costs, for example, is smarter and simpler than creating strategies to increase revenue.
When done efficiently and continuously, cost management positively impacts the company in a number of ways. Check out below what are the benefits of the continuous administrative management of your costs and resources. Keep reading.
Reducing risks
Not being fully aware of the expenses and costs involved in running your company is one of the reasons why many companies close their doors. As a consequence, the dynamics of this sector is unknown and presents uncontrolled behavior.
However, by properly managing the fixed and variable costs of the business, it is possible to have better planning and financial management, as well as increased budget visibility and security, which allows for decisions to be made before getting into debt.
Decreasing expenses
How can you cut and decrease the company’s expenses if you do not know them in depth? An effective and continuous cost management makes it possible to identify the waste of resources and exaggerated and superfluous expenses that can go unnoticed in the routine of a corporation.
By doing this, you will have enough information to cut accounts, establish the habit of economics, reduce the volume of input purchase, and consequently lower costs at the end of the month.
Increased profitability
The management of a company works in a cyclical way, that is, one action influences another. When you save on one department, the effects are noticed in the final profit. Therefore, by constantly and properly managing all costs and cutting unnecessary expenses, you will ultimately see an increase in your profitability.
The mistakes commonly made in cost management
Some managers often make some errors and mistakes that can jeopardize the cost control. So that you do not do the same, we selected the mistakes most frequently made in management. Check out below what they are.
Little investment in technology
The market is constantly innovating in order to meet demands. In addition, the market industry is increasingly competitive, and there is no room left for companies that stopped in time and still adopt manual methods in their processes.
Betting on technology is investing in growth and in the better use and optimization of time. Many of the old management techniques are no longer efficient or even viable. There is no more time to lose with annotations on diaries, notebooks, and piles of files.
To avoid making this mistake, bet on technologies and use strategic cost management software, systems and other tools that make your work easier. They can store information more quickly and safely.
Lack of predictability of expenses
Another great error that can lead to serious consequences is to not predict the company’s expenses. Many managers do not estimate the costs of projects and strategy implementation. As a result, the values end up being greater than the finances allow, which results in loss.
Therefore, always make forecasts by reporting and analyzing the values of all the steps of an activity before carrying out the plan. It is important to research prices and especially analyze cost and benefit in order to verify if the proposed action is possible for the enterprise at that moment.
It is also important to emphasize that analyzing the relevance is essential, so that the most affecting and significant aspects of cost management are considered first. That way, you do not waste excessive time on decisions that, in the end, have little impact.
And remember: when there is no cost management, there is a great risk of getting into debt.
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