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:
1. 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:
- Will it be an analysis of Costs and Results by Products or Services?
- Maybe by Clients and Channels?
- By Markets?
- 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.
Do you know the main challenges of a reduction within a cost management project? Then download our e-book about the 7 greatest challenges of efficient cost reduction and learn about them right now!