Cost management: see what it is and how to do it in your business
Cost management is the intelligent management of any company’s expenses. Without a job well done, it is not possible to optimize costs, nor identify opportunities that increase profit, reduce unnecessary expenses. Its task, therefore, is to make each decision more strategic within organizations.
For those who manage a company it is nothing new to face challenges and have certain “headaches” in their daily lives.
These are the pains of those who undertake and intend to make a difference. However, it is not uncommon not to have control of the entire operation. And then a yellow light lights up.
Cost management within companies is one of the main missions any manager has – and you know it very well.
Managing and controlling expenses well is a strategic issue for your business. A job well done will keep the company not only viable.
It will, indeed, provide a paved path to be followed in order to be able to reduce unnecessary costs and, even better: maximize gains.
But how is this possible? How do you optimize costs and ensure smooth financial health for the business?
We’ll talk about it from now on, giving you some tips and actions that you can put into practice in your company.
Stay with us.
First of all: what is cost management?
Basically and directly, cost management is the correct management of expenses that a company has. Regardless of whether there are a lot of expenses or not, all companies have it, right?
Any manager wants to make their business not only solid, but also pave the way for continued growth.
But it’s not always easy to organize everything you spend. And then the difficulties start to appear.
Without having accurate information in hand, making assertive decision-making becomes more difficult. And things start to get complicated…
Efficient cost management allows companies to identify opportunities: not only for investment but also for cost reduction.
In order to consider the expenses that the company has and manage expenses correctly, it is necessary to take all costs into account.
After all, basically all the investments that an organization makes are considered costs. So don’t ignore:
- product or service creation;
- expenditure on inputs;
- employee payroll;
- rent, electricity, water, transportation, among many others.
Even because, without knowing all these costs, how can you calculate your profit margin. And if you don’t know how much profit, how will you know how much you’ll need to sell monthly?
It is possible that you will have even more losses. After all, without proper financial management you compromise the sales management of your business.
What is the purpose of cost management?
Cost management is and will always be a strategic tool for the company’s administrative management . After all, it brings a series of rich and detailed information about the operation.
Carrying it out incompletely can cause immediate losses and reflect on a drop in revenue, productivity and affect the sales process completely.
Therefore, managing costs correctly helps companies to:
- have accurate and complete information about the yield as well as the performance of various operations;
- helps to control, plan and develop any activities;
- provides all kinds of insight for more accurate, data-driven decisions.
Another objective of doing an efficient job is to be able to price what your company sells.
You see which products or services have more added value and which can be sold for a higher price and which can be cheaper.
The benefits of correct cost management
Good expense management goes far beyond increasing revenue. Of course this is an immediate benefit, but there is much more to reap when this task is done well.
Balance is fundamental to anything in our lives. When we talk about a company’s finances, this remains true.
Finding the break even – the financial breakeven point in organizations – is essential and always will be.
Knowing what and how much goes in and out makes everyday life safer. And investing in an improvement or seizing market share is not an impossible task.
Therefore, we have separated some benefits of correct cost management within companies.
If you do a close inspection and detail what you spend, then it will be possible to intelligently see waste.
It’s like we’ve said in the entire text so far: you’ll have much more accurate data to make decisions. Therefore, you will know exactly what can be cut and/or optimized.
So, spend only what is essential to keep your company’s operations up to date without, of course, limiting production capacity.
Less risk for the business
With accurate accounts, knowing how much goes in and especially how much goes out, you reduce the risks of your company simply becoming impossible to maintain.
But, by making inputs, raw materials and fixed costs cheaper, you start to have more cash on hand to optimize business management.
In addition, it can be strategic and focus efforts and resources on sectors that are vital today and in need of special attention.
More quality products and services
By reducing unnecessary costs, the manager is able to reallocate costs to improve the developed product or service.
Let’s say your company is SaaS . And once you identify unnecessary expenses and cut them, you can invest in high-end equipment.
This will undoubtedly make a new feature, for example, come out with a much higher quality – which will be reflected in the customer’s success with your tool.
With better products and services, you can be more competitive in the market. You will not need to “sell lunch to pay for dinner” and will be able to continually innovate.
In addition, it will help – as we mentioned earlier – in pricing. And if you’re managing your costs well, you can put a more competitive price on your competitors.
You reduce costs, direct investments, put a competitive price and manage to sell more and better.
What does this all generate? Bigger profit, of course. One action has and always will have an influence on others. And when you manage costs correctly, you trigger this chain reaction.
Good practices in cost management
Making the correct cost management undoubtedly contributes decisively to a much better work environment and organizational climate .
In order not to propose impractical prices that threaten the company’s profit, it is necessary to understand some of the pillars of cost management:
- Control – nothing can be left out. Fixed and variable costs, however small, must always be accounted for;
- Registration – data collection must be rigorous and careful. A wrong number can decisively compromise the entire operation of the company;
- Balance – look for the best cost-benefits in all sectors without sacrificing quality.
A good practice at this point is to resort to using SWOT Analysis .
You survey the costs of your business and understand how it relates to aspects of your business,
In other words, you understand how a budget that is in location A can, when going to location B, yield more results for the organization.
This will help managers to be clear about which paths to take. Have a clear picture of what expenses are above what is needed.
Of course, the closer the management is. In other words, the more immersed you are in your daily life, the faster you will be able to identify waste, for example.
The buzzword “time is money” is true. And so, the sooner you identify defections, the quicker you’ll act to fix it.
The most common mistakes in cost management
Knowing how to manage costs well also involves understanding which are the most common mistakes that cause losses for companies.
We mentioned some of the most common mistakes that may be happening today in managing your business.
Therefore, pay attention to the following items:
Failing to calculate cost and selling price of services or products
The sale price of the product or service can never be lower than the cost to produce it. This is a mistake that will fatally ruin any business.
Likewise, matching the prices will make any growth of your business unfeasible. The famous “oxo” won’t get you anywhere – although it avoids damage.
The key is to know how much you spend in order to know how much you can charge to start making a profit.
Do not measure the company’s profit or loss in real time
The faster you see the numbers, the quicker you make decisions to improve them.
Companies that cannot measure profit or loss in real time have difficulties in managing their costs well.
This is dangerous and can deteriorate the economic health of your business. Not automating processes goes against best management practices.
Do not consider inventory losses
Losses within inventory need to be considered as a cost. And neglecting this is having inaccurate numbers.
If some product spoils due to poor storage, for example, and needs to be discarded, you consider it an expense;
The ideal, obviously, is to do a good inventory management so that this does not happen.
But if you need to invest in warehousing, start by managing costs initially to see where there is money left over for that investment.
Stop investing in technology
The digital transformation in all areas of the company is an essential factor. To manage costs is no different.
Managing a company in the “traditional” way no longer guarantees the viability of a business – let alone competitiveness.
Routine demands a lot from all of us and, therefore, technology plays an important role and cannot be ignored by companies.
Tools like an ERP help any organization’s financial management and need to be present.
Having control over sales is equally important and the technology that a CRM brings needs to be inserted in the sales routine .
This way, you can have not only the cost management of your business, but the total control of the operation.
Which will automatically optimize your spending and ensure you’re more productive and competitive in your business.
So, how can we help you?
If you have questions about the article or want to learn more about the technology to manage costs in your company, talk to a consultant .
Take the opportunity and read two articles that will help you to have processes always optimized and that will help you to better manage your daily expenses.
The first talks about a methodology called Theory of Constraints and how it identifies and corrects problems within companies.
The second addresses how the kanban model organizes processes and makes routine more productive.