Cost management

Published on 02/04/2024

Cost management

Published on 02/04/2024
Recibe nuestra newsletter mensual con todas las novedades del sector y los últimos artículos
Tabla de contenidos

Cost management

Proper cost and expense management allows companies, regardless of their size, to achieve their annually set objectives and promote their company’s growth. That’s why carrying out meticulous cost management control and not letting any detail escape, is especially useful.

Commercial cost management enables understanding the company’s overall economic structure, measuring and achieving results, analyzing them over time, making budget forecasts, directing resources more productively and competitively, monitoring cash flows, reducing time losses, and estimating hiring possibilities, as well as some production activities. In this way, costs and waste can be reduced.

What are the costs of a company?

Each cost has an economic value for the company, which allows for quantifying the resources that the company had to spend to achieve a goal. It is, therefore, fundamental to know the variety of cost types to optimize and get the best benefit from the resources committed to achieving a certain objective.

Generally, the most common costs are those related to the company’s productive activity: sales, the purchase of raw materials; such as products or tools, reimbursements, taxes, fees, commercial activities, marketing activities, and professional personnel.

Costs, specifically, can be divided into 3 categories: Fixed, variable, and semi-variable costs. Concepts that we will explain below.

Types of costs in a company

To understand how to carry out proper cost management, it is necessary to recognize the difference between the expenses of the activities that the company addresses to achieve its objectives. It is an analysis of the data, which improves cost management and the company’s results. For this, it is necessary to consider the three main categories that must be kept under control:

  • Fixed costs: These costs do not vary over time, regardless of the company’s productive activity. These include, for example, employee salaries, insurance, or supply contracts for certain services.
  • Variable costs: This type of cost can change in proportion to the variation of the company’s economic activity.
  • Semi-variable costs: This type of cost consists of a fixed part and a variable part.

The set of fixed and variable costs is represented by total costs. There is an additional classification represented by direct and indirect costs.

  • Direct cost: It is easily identifiable because it refers to a specific cost, such as travel expenses, equipment, or employee salaries, among others.
  • Indirect costs: They are not directly related to the company’s economic activity. Some of these costs are usually the rent of an office, administrative expenses, and the internet connection, among others.

How to do proper cost management

Cost management is composed of five fundamental processes or steps: resource planning, objective planning, cost estimation, budgeting, and cost control or monitoring. Below, we detail each of these processes.

Resource planning

Resource planning is associated with business projects, and project managers are responsible for this organization since they deeply know the objectives and the steps for their execution.

Usually, a work breakdown structure is performed that teaches the project along with the activities and resources linked, in a hierarchy from most to least important. In this way, a general picture is obtained that helps to understand where most of the costs will be channeled, as well as towards which activities fewer expenses will be required.

Objective planning

Once a precise analysis of the incurred costs has been carried out, it is necessary to consider the objectives that our business wants to achieve.

Cost management, as well as the allocation of economic resources to a specific productive activity, must always be evaluated considering the achievement of the company’s objectives.

Cost estimation

The second step for proper cost management is the estimation of the same; this process is iterative, that is, it will change according to the project’s evolution.

It is about foreseeing financial resources and taking into account every element required for a specific project, from materials to labor, in this way, it will be possible to carry out the next step, budgeting.

For this process, there are many different estimation techniques: conceptual objectives, historical knowledge, deterministic techniques, or for each involved resource.

Many professionals trust deterministic techniques since they have proven to be quite accurate. This technique is particularly useful if all the details of the project, including the scope and results, have been mapped.

Budgeting

Once the cost estimation has been made, it is possible to define the budget, as it is the basis for this third phase.

The budget allows for the construction of an orderly and logical economic model based on the balance between expenses and income; that is, it generates financial coherence to carry out each activity.

Budget management is the practice of a company’s direction, which defines, in volume and in value, the economic forecasts of the organization’s activity, generally within the period of a year. It is related to the planning system, the accounting organization, and the company’s hierarchical structure.

Budget planning provides a series of phases that will help the project achieve its objectives.

Expense control

This last phase serves to measure the project’s performance within the company by comparing its value with its actual total cost and the time invested, or the activity schedule. This way, it is possible to have a reference point during the project execution.

To do this, it’s necessary to establish the indicators and verification sources that will be used to monitor the tasks linked to the project. It is important to determine the means for data collection, the frequency, and the responsible parties for reporting.

To correctly execute each of the processes mentioned, but especially the control and monitoring of expenses, it is advisable to rely on software for cost and project management, a tool that automatically collects information, providing objective and precise data.

Periodicity is fundamental; the updated status of the project costs must be monitored to keep the expenses linked to each project under control and to implement a saving strategy, promoting the profitability of the business.

Having measurement tools is key to evaluating the effectiveness of the activities and improvements applied to cost planning, as well as the project itself.

How do you reduce business costs?

To reduce your business’s costs, it’s necessary to analyze, over a certain period, the costs the company had to incur and which were excessive expenses. It’s very useful to opt for allocating the company’s resources to the most profitable activities, keeping cash flows under control, resorting to subcontracting if necessary, and eliminating activities that are not profitable for the time they require or other reasons.

To reduce expenses, optimize business management, and carry out adequate planning, it’s generally necessary to identify and understand which costs are not necessary to achieve the project’s and business’s objectives in relation to revenue. Only then is it possible to perform an analysis and make effective plans.

What is process outsourcing?

Within cost management, one of the systems most adopted by companies to contain and reduce business costs is the so-called “outsourcing,” which allows the company to delegate a specific part of its activity to another company.

To consolidate alliances and contacts of this type, it’s necessary to perform a market analysis and understand which companies have the most experience.

Software to monitor business costs

Many companies decide to trust the management of costs, projects, and activities to specific software, designed to support companies of all sizes, such as project measurement, and cost control software from WorkMeter.

Such tools allow for optimizing and automating the economic management of the company, helping executives and managers to predict costs over a certain period.

Business intelligence is nowadays the best solution for cost management, as it provides a constant and objective analysis of aspects that are difficult to identify, promoting more efficient and effective work.

Project Management software - free trial

Tabla de contenidos

Artículos relacionados