Cost Management is an integrated program of sustainable cost reduction and continuous cost control. It is a corporate culture and an essential part of every business. Any business that has costs (who doesn’t?) should have and will benefit from a Cost Management Program. It is a necessary part of what is needed to grow a business and thus, survive.
I focus on working with small and medium sized businesses. Cost Management Programs are great for all sized organizations because they don’t have to be big to be successful. They are also a good way to start organizational improvement.
Cost Management Programs, if designed and implemented correctly, are:
· Easy to install
· Easy to maintain
· Self adapting
· Sustaining and not subject to going out of date
A good program must be aligned with company quality, service, and growth goals and should be evaluated for any possible risks. In fact, most programs will improve quality and service and savings generated by a well thought out program will be available for growth. And, they are self funded, no matter the situation. Savings generated, quickly exceed the costs of the program development and will start producing savings even before fully implemented.
Why can’t you do it yourself? Most informal programs do generate savings, but tend to miss many opportunities and are rarely sustained. Systems and policies that are easy to use and create meaningful information and results are available without reinventing the wheel. Most times outside implementation help can build company morale rather than having employees feel like ownership is just trying something new that might make their jobs tougher.
Answer these questions:
· Do you have significant competition?
· Are you facing downward price pressure?
· Are operating or production costs increasing?
· Are you satisfied with your profits?
I think I know the answers, if you are like most business owners/managers. And if I am right, you should have a Cost Management Program that will help change those answers.
Cost Management Components
As I wrote in my introduction, a Cost Management Program consists of two basic parts. Cost reduction and cost control. Cost reduction is a process that is done occasionally, but creates an awareness and thought process that is always present. Cost control is an everyday series of policies and procedures that become a normal part of business operations.
Cost reduction is the process of evaluating expenditures and operations to find and eliminate waste, redundancies, and lost time.
There are hundreds of places to look and each one has the potential to add money to your bottom line. Supplies, maintenance, technology, utilities, and insurance are only a few of the things that need to be analyzed.
Operational efficiency analysis and improvement is another area that can, and usually does, yield significant savings. Time is money!
A well thought out plan looks for ways to reduce costs through better purchasing or supply chain cost reduction. That doesn’t necessarily mean new suppliers or lower prices from your current supplier. There are other things that suppliers can do to save you money.
Remember, reducing costs at the expense of quality or service is not what works. Your quality and service standards will be the measure of what changes can and should be made.
Cost control is the evaluation of spending before and after it occurs and involves creating, implementing, and monitoring policies and procedures throughout your company.
It involves budgeting, purchasing and accounting policies, monitoring supply and raw material costs, job costing, and daily, weekly, monthly, and annual analysis. That sounds like a lot, but when designed correctly, it is routine, easy, and takes very little time. The result is a well controlled, more competitive, and profitable business.
The combination of these two parts creates a Cost Management Program that can produce dramatic, long term, sustainable savings and a better, leaner, more profitable business.
I will continue this series by going into greater detail on both Cost Reduction and Cost Control.
Cost reduction is the process of evaluating expenditures and operations to find and eliminate waste, redundancies, and lost time.
There are hundreds of places to look and each one has the potential to add money to your bottom line. Supplies, maintenance, technology, utilities, and insurance are only a few of the things that need to be analyzed.
Operational efficiency analysis and improvement is another area that can, and usually does, yield significant savings. Time is money!
A well thought out plan looks for ways to reduce costs through better purchasing or supply chain cost reduction. That doesn’t necessarily mean new suppliers or lower prices from your current supplier. There are other things that suppliers can do to save you money.
Remember, reducing costs at the expense of quality or service is not what works. Your quality and service standards will be the measure of what changes can and should be made.
Cost control is the evaluation of spending before and after it occurs and involves creating, implementing, and monitoring policies and procedures throughout your company.
It involves budgeting, purchasing and accounting policies, monitoring supply and raw material costs, job costing, and daily, weekly, monthly, and annual analysis. That sounds like a lot, but when designed correctly, it is routine, easy, and takes very little time. The result is a well controlled, more competitive, and profitable business.
The combination of these two parts creates a Cost Management Program that can produce dramatic, long term, sustainable savings and a better, leaner, more profitable business.
I will continue this series by going into greater detail on both Cost Reduction and Cost Control.
Cost Reduction
The quickest and surest way to improve profitability is to thoughtfully and effectively reduce costs in your business. I actually like to think of a cost reduction process as a profit finding process, because every dollar saved goes to your bottom line. The following example of a simplified P/L illustrates how much more cash can be generated for your business through cost reductions than can be generated by increasing sales. A 10% reduction in costs generates a 9% increase in profits (pre-tax). A 10% increase in sales provides only a 1% increase in profits (pre-tax).
In this oversimplified example COGS and general expenses were reduced 10% and the results are dramatic. These results could be smaller or greater depending on the exact structure of your expenses.
Reducing COGS is a combination of analyzing raw material supply chains and internal operations. Reducing general expenses is the process of reviewing both fixed and variable expenses. Adopting an “every penny counts” attitude is not as old fashioned as it sounds and should be adopted from top management on down.
COGS reduction is key in the cost reduction process. Raw material and labor costs are probably the largest expense in your company and should be constantly monitored. Suppliers of raw materials may have cut prices quite a bit in today’s environment, but may still be complacent with your business. Renegotiating or looking for alternative materials may be possible, but not at the price of sacrificing quality or service. Even if material costs are the lowest possible, new strategies may lower your overall material costs. Lower inventory levels, consolidation of inventories, and lower delivery costs are just some of the things to look at. Labor costs must also be considered. Indiscriminate layoffs are not the answer. Productivity is!
Opportunities to reduce general expenses are many and a comprehensive audit of your expenses will show any number of ways to increase your bottom line. Even fixed costs should be looked at. Many companies have consolidated operations, developed shared services programs and found numerous ways to cut fixed costs. All items should be looked at with a keen eye. Even the smallest expenses may be trimmed and the cumulative effect can be substantial.
In a recent survey it was reported that although most companies have taken cost reduction actions recently, a majority responded that the plans that they have in place today will not allow them to achieve their overall goals. Lack of resources, internal challenges, and lack of analytical capabilities were some of the reasons cited for not realizing or even recognizing cost reduction opportunities.
Cost reduction is no longer an option for most companies. It is required for a company to stay competitive in today’s business environment.
In this oversimplified example COGS and general expenses were reduced 10% and the results are dramatic. These results could be smaller or greater depending on the exact structure of your expenses.
Reducing COGS is a combination of analyzing raw material supply chains and internal operations. Reducing general expenses is the process of reviewing both fixed and variable expenses. Adopting an “every penny counts” attitude is not as old fashioned as it sounds and should be adopted from top management on down.
COGS reduction is key in the cost reduction process. Raw material and labor costs are probably the largest expense in your company and should be constantly monitored. Suppliers of raw materials may have cut prices quite a bit in today’s environment, but may still be complacent with your business. Renegotiating or looking for alternative materials may be possible, but not at the price of sacrificing quality or service. Even if material costs are the lowest possible, new strategies may lower your overall material costs. Lower inventory levels, consolidation of inventories, and lower delivery costs are just some of the things to look at. Labor costs must also be considered. Indiscriminate layoffs are not the answer. Productivity is!
Opportunities to reduce general expenses are many and a comprehensive audit of your expenses will show any number of ways to increase your bottom line. Even fixed costs should be looked at. Many companies have consolidated operations, developed shared services programs and found numerous ways to cut fixed costs. All items should be looked at with a keen eye. Even the smallest expenses may be trimmed and the cumulative effect can be substantial.
In a recent survey it was reported that although most companies have taken cost reduction actions recently, a majority responded that the plans that they have in place today will not allow them to achieve their overall goals. Lack of resources, internal challenges, and lack of analytical capabilities were some of the reasons cited for not realizing or even recognizing cost reduction opportunities.
Cost reduction is no longer an option for most companies. It is required for a company to stay competitive in today’s business environment.
Cost Control
Cost control is a series of policies and procedures that detect, diagnose, and correct differences between actual and budgeted costs in your business. It is a routine, continuous set of activities that starts at the top and is contributed to by everyone in an organization. Cost reduction is done periodically and can have dramatic effects on your bottom line, but without a sound, on going cost control program, the effects may be short-lived. In today’s increasingly competitive business environment, getting the most from existing resources while ensuring that costs don’t escalate is one of the keys to business success.
Cost control can be broken down into many parts and the larger and more complex your organization is, the more detail may be necessary, but there are four main elements to a well planned cost control program.
*Budgets and Financial Reporting
*Purchasing
*Costing
*Analysis and Review
Every company large or small should have budgets and review them against actual costs on a regular basis. For budgets to be useful they must be as accurate as possible and should be based on your actual experience. Accurate financial reporting is essential to produce budgets and to compare your company’s performance against. The better your reported history the better you can budget. If you do a comprehensive budget for your overall business at least once a year, you will have the opportunity to evaluate costs and make decisions that will increase profits. A well thought out financial reporting system will make analyzing business costs and company performance very easy and should be tailored to match the type of business that you have.
Purchasing should have very definite controls in place and has the potential to save or cost your company lots of money. Requisitions, bid requirements, approval and monitoring policies are very simple to implement and maintain and have long term positive effects. Coupled with budgets, these policies and procedures become the norm and will help maximize profits.
Costing is the process of keeping track of what is actually spent to sell a product or service. Depending on what business you are in there are different methods and complexities for costing. I have been telling people for many, many years that if you don’t know how much it costs to produce something, you can’t know how much to sell it for. There are several components to good costing. Standard costs, budgeted costs, and actual costs are all important to document. Standard costs are the costs that you would have in an ideal world and are the benchmarks that are used for analyzing your performance. Using external (industry averages or other similar organizations) benchmarks may show that your performance is above or below average and give you good guidelines for improvement. Standard costs assume optimum performance and use of resources. Budgeted costs may be higher than standard costs, as you might take into consideration waste, shrinkage, or other real world factors. Comparing actual costs against standard and budgeted costs helps you focus in on areas that can be improved.
All of these components have benefit, but without regular analysis and review many opportunities for improvement will be missed. A set of well thought out procedures, policies, and reports will tie together all of the information that owners/managers need to make sound decisions that increase profits and keep you competitive. The very definition of cost management means not creating tedious, time consuming tasks, but rather concise, relevant, snapshot reports that allow decision makers to quickly measure how the operation is doing at any given moment.
Business success is about teamwork and it takes teamwork to control costs. Having all the pieces in place and with the support of top management, cost control becomes less about constraint and more about evaluation and improvement that can be appreciated and contributed to by everyone in the organization.
Cost control can be broken down into many parts and the larger and more complex your organization is, the more detail may be necessary, but there are four main elements to a well planned cost control program.
*Budgets and Financial Reporting
*Purchasing
*Costing
*Analysis and Review
Every company large or small should have budgets and review them against actual costs on a regular basis. For budgets to be useful they must be as accurate as possible and should be based on your actual experience. Accurate financial reporting is essential to produce budgets and to compare your company’s performance against. The better your reported history the better you can budget. If you do a comprehensive budget for your overall business at least once a year, you will have the opportunity to evaluate costs and make decisions that will increase profits. A well thought out financial reporting system will make analyzing business costs and company performance very easy and should be tailored to match the type of business that you have.
Purchasing should have very definite controls in place and has the potential to save or cost your company lots of money. Requisitions, bid requirements, approval and monitoring policies are very simple to implement and maintain and have long term positive effects. Coupled with budgets, these policies and procedures become the norm and will help maximize profits.
Costing is the process of keeping track of what is actually spent to sell a product or service. Depending on what business you are in there are different methods and complexities for costing. I have been telling people for many, many years that if you don’t know how much it costs to produce something, you can’t know how much to sell it for. There are several components to good costing. Standard costs, budgeted costs, and actual costs are all important to document. Standard costs are the costs that you would have in an ideal world and are the benchmarks that are used for analyzing your performance. Using external (industry averages or other similar organizations) benchmarks may show that your performance is above or below average and give you good guidelines for improvement. Standard costs assume optimum performance and use of resources. Budgeted costs may be higher than standard costs, as you might take into consideration waste, shrinkage, or other real world factors. Comparing actual costs against standard and budgeted costs helps you focus in on areas that can be improved.
All of these components have benefit, but without regular analysis and review many opportunities for improvement will be missed. A set of well thought out procedures, policies, and reports will tie together all of the information that owners/managers need to make sound decisions that increase profits and keep you competitive. The very definition of cost management means not creating tedious, time consuming tasks, but rather concise, relevant, snapshot reports that allow decision makers to quickly measure how the operation is doing at any given moment.
Business success is about teamwork and it takes teamwork to control costs. Having all the pieces in place and with the support of top management, cost control becomes less about constraint and more about evaluation and improvement that can be appreciated and contributed to by everyone in the organization.
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