Imagine this situation: The sales team celebrates good results, but the company still does not have a satisfactory profit margin. This type of situation is common and indicates some challenges of cost management.
If the amount of capital going into cash is not enough to make a profit, the entrepreneur needs to carry out a major study of their processes in order to understand what might be wrong.
The problem is that the company doesn’t always get this analysis right – and ends up making the wrong cuts, hurting operations. In order for your company to not go through this, we decided to give some tips that will help you. Enjoy your reading!
1. Find out if the company is profitable
Rate of return and profitability are not synonymous. Before focusing on cost reduction, the entrepreneur needs to find out if their business is bringing return on the investment made. To this end, they need to define the profitability of the business.
Thus, the first way to overcome the challenges of cost management is to be on time with accounting, as the accounting team will be responsible for analyzing gross and net profit, tax costs, and so on.
2. Find the waste
Some companies do not have as one of their internal goals the fight against waste. This is a serious mistake. Currently, there are technological resources capable of bringing economy and efficiency for most processes.
Energy consumption can be reduced if the company starts to use more modern machines, LED lamps, or even invest in solar energy. In addition to electricity, excessive consumption of raw materials, the need for rework, and other expenses also come into this calculation.
To identify waste, the company should modernize its process analysis by using management software. In this case, you can’t rely on the old Excel spreadsheets.
3. Identify fixed and variable costs
Among the challenges of cost management, there is the need to understand how fixed and variable costs impact the company’s cash. In theory, entrepreneurs have a clear notion on the topic. After all, fixed cost is the one that does not change according to production, and variable cost is what accompanies this factor.
An example of a fixed cost is rent, while raw material consumption may indicate a variable cost. The best way to control permanent expenses is by identifying them, and then negotiating with suppliers.
The same logic goes for variable expenses. They can be further improved with a sales planning – including the right pricing. For example, the company may accept more orders than it can produce, increasing production costs and incurring losses due to inadequate pricing.
Undertaking an enterprise is equivalent to investing and this initiative is only advantageous when the entrepreneur understands the risks of the investment and has a sense of how much return they will have.
Now that you have a little more understanding of the challenges of cost management, you may have realized that control over internal company information is critical. That is why the use of management software is an investment that makes this mission easier.
However, choosing an inappropriate tool can create problems rather than solve them, as we have shown in this article on the topic.