Cost management is a fundamental aspect of corporate planning. Without good analysis and good management of a company’s investments and internal finances, it’s impossible to know how much each product and service costs and which products, services, clients and channels are really profitable.
Many companies tend to use Excel spreadsheets or Enterprise Resource Planning (ERP) software, which can handle company needs in terms of cost analysis only up to a certain level of precision. However, when more accuracy and flexibility are needed – and the time available for retrieving and analyzing data decreases – cost management software offering greater detail, practicality and flexibility, becomes indispensible.
For this post, we’ve gathered together information on this subject. If you want to know why you should invest in cost management software, read on!
Why invest in cost management software?
In many cases organizations of various sizes perform cost analyses using simple spreadsheets. Despite their ease of use, the creating a model using Excel spreadsheets presents various problems in terms of model flexibility, information security, and a lack of cost tracking and forecasting components; invariably the user ends up dedicating lots of effort to maintenance and spends little time on continually improving the model. It isn’t rare for us to come across clients who construct truly integrated systems based on hundreds and frequently thousands of associated spreadsheets.
A recent report by Ernst & Young states that “modeling costs with spreadsheets can only be done for very simple models and even with these models it can be very difficult to analyze them and make decisions based on them, which is why they are not recommended.”
By using cost management software, you’ll have the tools and components necessary to control all your company’s costs in a simple manner. Complex analyses such as an analysis of capacity/idle time costs, profitability per Product, Service, Client and Channel, and detailed analyses of effort related to processes, as well as other analyses, can be accomplished easily using an appropriate tool designed and built for this very purpose.
How can I calculate costs correctly?
One difficulty that companies constantly face is determining their costs correctly especially when they have a wide variety of products, services, clients and channels. In addition, the progressive increase of administrative and overhead costs in general makes determining costs a true challenge for any type of organization. Assigning costs using simple rules such as quantities or revenues was good enough when administrative costs were not significant, but in today’s environment greater accuracy is needed and this is no longer a viable approach.
In general companies know their total costs, revenues and results, but how much does this mean in terms of each product, service, client and channel? Using business rules and cost drivers that correspond to reality and cause and effect is essential to achieving greater accuracy in this calculation. Questions such as reciprocal cost assignments where different administrative areas charge each other various costs (for example: HR provides services to Systems and Production; Systems provides services to HR and Production) and the need to understand exactly how the costs in support areas affect the costs of Products, Clients and Channels cannot be determined using simple spreadsheets, which won’t provide the results necessary to facilitate good management.
How do I control process costs?
In general, organizations have already mapped or are mapping their processes to reduce inefficiency, diminish rework, and document their practices. But how much does each task, activity or process cost? How many of these costs are inherent to the Process and how many come from Support Areas? Furthermore, how much do these costs contribute to your company’s various Products, Services and Channels? These are some of the questions which are answered by cost management software.
These systems also make it possible to generate graphics quickly, selecting only data that is of interest, which makes it easier to observe crucial information that can be used to make decisions in terms of Costs and Profitability.
How do I analyze cost indicators, flow charts and cost tracing?
Another efficient way to control costs is through the use of cost indicators. They are completely integrated in cost management software, making the overall control of costs easier.
Besides this, you can control how different areas of your company affect costs, generating flow charts and detailing the contributions of each department.
Another useful tool is cost tracing which allows you to determine the source and destination of Product costs, analyzing the impact of different tasks related to the Product, enabling you to reallocate investments or costs, optimizing the process as a whole.
If you’re a manager and perceive that you need to make more efficient financial decisions more quickly and more strategically, installing cost management software is without a doubt a great choice.