Every businessman knows that controlling a company’s costs is important, however, when everything’s going well this fact can be forgotten, and often it’s remembered only when an economic recession comes – like the one we’re going through today.
When facing a crisis, two words should become more important: cost management. Find out more about this!
What is it?
Basically, cost management is rethinking your costs in terms of the products and services that your company offers. In a shoe factory, for example, this involves all the costs that go into producing the final product, the shoes.
Some businessmen believe that it’s important to cut costs in this case, but cutting costs without studying their effects can be dangerous. For example: a company decides to lay off temporary workers, but months later it won’t be able to accept a big order because it doesn’t have enough employees to do the job.
How should you manage costs?
The first step in managing costs efficiently is identifying waste. Think of your company as a residence. What advice would you give a housewife who’s complaining about her household budget, but always leaves her taps running?
To find out where your company is wasting resources, it’s important to monitor internal processes in order to perceive whether they’re being conducted in an efficient manner.
You could be losing sales because your salespeople aren’t providing the correct information, for example, which would demonstrate that there’s a problem with your hiring and/or training of employees.
Is reducing quality an option?
At times of economic crisis, people rethink their spending. Your customer may do the same thing and begin to use another less expensive brand to save money. However, the businessman should have a long-term vision and realize that crises come, but also go away. Thus, you need to analyze the risks that changing the quality of your product could pose for you in the future.
This doesn’t mean that a company can’t reevaluate supplier contracts, on the contrary! Moments of economic crisis require this approach. Your procurement process should prioritize the best supplier for the lowest cost.
Some fundamental company decisions will be made quickly, which is why data related to purchasing and costs should be analyzed with precision.
Having this information in digital form is fundamental, but it’s no use having hundreds of spreadsheets that no one understands. This type of data storage and analysis only wastes your company’s time and money.
To implement good cost management means making the right decisions and, to do this, you need to have quality information always in the hands of the company’s leaders.
Companies of various sizes already use software to improve their business’s information management. These programs don’t just organize data, they analyze it, helping your company make better decisions.
Cost management isn’t something that needs to be done only in moments of crisis, but it’s at these times that it becomes essential. Why not start now? Discover our solutions at www.myabcm.com/solutions/
An organization needs to forecast and control its costs and results in order to be successful in carrying out its plans. Do you know the steps to managing your costs well?
Given the importance of cost management, it’s time to learn how to adjust it according to your company’s goals. Before putting cost management into practice, businessmen need to prepare the following steps. Take a look!
What is a cost management project?
This type of project aims to improve the management of the most diverse costs that the company has for each activity, such as marketing actions, administrative tasks, operational activities and varied investments.
Within the project, management is understood as calculating, controlling and allocating all the expenses mapped within it. To do so, it is necessary to go through some steps, such as planning, performance, measurement of results and others – which we will address in the next topic.
The 5 steps of a cost management project:
Definition of objectives
Every project developed in organizations must fulfill some specific purpose. This purpose must be defined before the project starts, because the goals will guide all subsequent implementation steps. When defining the objectives, you need to answer questions like:
By Branches or Segments (if we’re dealing with banks)?
It could even be Projects or a mix/combination of the above-mentioned dimensions. Perhaps it could be a better understanding of the company’s installed capacity x idle time or even a cost reduction project?
This definition is fundamental and will serve as your compass in guiding the implementation process as a whole.
At this point, in addition to defining the Project’s Objectives and the Cost Objects to be developed, we should also begin to prepare a preliminary study of the analyses which will be required after the project finishes, as well as their depth and detail.
2. Mapping processes
Mapping a process, in corporate language, means designing the flow of its activities, inputs and outputs. This mapping is the design of the current state of the process, and you need to envision it in its entirety before you can optimize it.
With this panoramic view of the process, it’ll be easier to make the necessary improvements before they are put into practice, which will avoid any unpleasant surprises along the way.
Processes have specific objectives in the context of a firm. When these processes are considered together with the company’s activities and the impact that these processes have on each Cost Object, very interesting analyses arise.
3. Identifying model inputs
Inputs refer to any element that is a starting point for a costing model and its results. They can be cost centers (coming directly from Accounting or the ERP), technical specs/raw materials, revenues or other information.
An input can be a financial value or a non-financial value related to quantities, along with the business rules or drivers that will be used in the cost assignments. This information will influence your processes and will help in the efficient management of costs in a manner consistent with your company’s situation.
4. Generating calculations, reports and outputs
A good costing model enables its managers to generate reports, cost analyses and results in a simple manner. Cost tracking is fundamental during this part of the process to understand the inputs and outputs for every element within the model. A good model requires little maintenance which lets managers focus their time on making the model more sophisticated and better able to meet their company’s needs.
It’s also crucial to be able to create basic and advanced business scenarios. These simulations should not require a large effort by managers as long as the costing model is well designed.
5. Progress and constant improvement
Companies are dynamic and susceptible to frequent structural changes. In this way, a costing and results model is practically a living organism, which needs to adapt to change and quickly reflect your company’s reality. It’s also important to work with three key words in mind “Measure – Manage – Improve” where constant improvement is an important component of strategic modeling. It’s very important that the managers understand that the costing and results model is not static and should always be improving so that even complex business decisions can be made in a simple manner through a coherent and dynamic model.
Advantages of a cost management project
By cutting the cost structure efficiently, you naturally spend less to deliver the products or services to customers. Consequently, the profit obtained from closed deals increases, as more net gain is left over with each new closing.
Although it is not possible to change the structure of operating expenses, so as not to jeopardize the quality of delivered solutions, if other expenses are reduced, less money leaves the cash flow month to month.
Reducing costs also makes it possible to reduce the amounts charged to customers, or to not apply planned readjustments – if this does not prove to be negative for finances. Therefore, competitiveness increases in relation to the competition due to the price factor.
And even if prices are not reduced, more profit and surplus by lowering the cost structure creates more availabilities for the company to invest in improvements and marketing and sales departments – which act to increase the market share obtained.
Reduction of risks
Does the company lack the availability to invest in marketing and sales? There is a risk of stagnating.
Is profitability very low due to high expenses? There is a risk of going bankrupt.
Are you unable to invest in improvements in your solutions? There is a risk of losing customers to the competition.
In addition to these examples, we could mention several other risks that companies without well-managed expenses may suffer. And like those already mentioned, other risks are also reduced after the successful performance of a management project.
Accuracy in pricing
Pricing products or services for a high value can take away competitiveness and disrupt the growth of the customer base. On the other hand, decreasing the values may not allow the organization to generate net results, which threatens the working capital and its continuity.
Pricing does not only serve to offer solutions to the public and generate revenue, which, in practice, does not mean good results if it does not generate profit. A correct pricing needs a balance between market supply and contribution margin – that which allows you to pay expenses and increase positive cash.
Without well-managed costs, the price calculation is done blindly and it is not known exactly whether sales cover them and make a profit, unless the decision is to have the highest market price without a strategy.
Achieving efficiency in cost management is fundamental to improving financial results and remaining competitive within the market. This is why the inherent aspects of this area require careful planning and you should avoid some mistakes that can hurt your business’s success.
Below we’ll talk more about these problems, what their consequences are, and how they can be avoided. Take a look!
1. Not registering operations
Operations need to be registered to maintain control of a company. When this isn’t done – or done in a negligent manner – it’s practically impossible to identify how much money will be coming in, how much the company has spent on bills, and how many sales have been made during a certain period, among other things.
This being so, it’s absolutely essential that everything that is done be registered, even the addition and subtraction of small values, which many seem insignificant, but these can add up, leading to a large hole in your accounts.
2. Not keeping track of your cash flow
Cash flow is the control used to register all capital movements for your company. By analyzing it, you can make strategic decisions in terms of working capital, stocks, and your balance between accounts receivable and accounts payable, for example.
Ideally you should review it daily, watching out for inconsistencies or items that haven’t been registered. Doing this frequently facilitates the identification of errors and more efficient remedial action can be taken when they are discovered quickly rather than a month later.
3. Not knowing your costs
When you don’t exactly what the total costs of your operations are – including product and stock costs, general expenses and labor costs, for example, you can’t control your company’s costs, let alone find ways to reduce their impact, which mainly affects your organization’s profitability.
Besides this, you need this knowledge to determine proper pricing, which will offer fair prices to your customers, but will at the same time be enough to cover your costs and generate a satisfactory profit.
Not pricing your products properly
Pricing your products properly is crucial when we’re talking about the survival and growth of companies. However, this strategy has to be very well planned, taking into consideration your business’s costs and expenses and what customers perceive as value – which will define whether they are disposed to pay for what you’re offering.
Establishing a very high price without justification will make your sales fall, while reducing your prices without reason (like a reduction in costs, for example) will seriously harm your financial results.
Using manual controls to manage your costs
With so many controls and monitoring required, and with a large volume of information generated every day, performing these tasks manually will subject this process to more errors and rework and will also make your data less reliable.
In this sense, investing in management software is essential. In addition to automating these activities, it helps in the analysis and decision-making processes by making information more reliable. It increases your business’s agility and productivity and reduces its costs.
In today’s article, we’ve cited just a few management mistakes that should be avoided. Ideally managers should constantly reevaluate their activities, looking for errors or bottlenecks which affect results, and find solutions to minimize or even eliminate these problems.
Now send us your comments and share your experiences and opinions about this subject!
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.
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.
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.
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.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.