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!

Define the project’s objectives

Every cost management project that a company prepares should have a specific purpose. This purpose needs to be defined before you begin the project, because the targets selected will guide all the subsequent steps of the project’s implementation. 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.

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 taken into account together with the company’s activities and the impact that these processes have on each Cost Object, very interesting analyses arise.

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.

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.

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.

Do you know the challenges of cost reduction? Then click here and download the e-Book “The 7 biggest challenges to efficient cost reduction” right now.