Cost management is a necessary tool to be able to make sound decisions in any area of the organization because there is a direct relationship between costs and the economic results of the organization.
Clearly in a competitive environment like today, the price is set by customers, the market and the competition. In these cases, the market sets prices (with margins above and below depending on some concepts such as brand, quality, etc.) and cost management, which helps to know what margin you have as well as to be able to act on the costs of the processes using benchmarking, continuous improvement, reengineering, etc.
In fact, the objective cost method is increasingly used, whereby, before developing a new product or service, it is calculated what the cost will be and if it is profitable for the organization's cost structure.
Some of the aspects in which cost management can help are:
- Know the exact costs and profitability of products / services. Determine the cost of a product / service prior to its development to know if it generates value. Know the costs and profitability of processes. Detect points for process improvement. Know profitability by segments / clients. Know business opportunities at a strategic level.
As can be seen, this information is critical for decision-making in «outsourcing» processes, in continuous process improvement and «benchmarking», in commercial strategies due to the knowledge of profitability by clients / segments,… that is, in most.
Due to the importance of this topic, it will be developed in several articles. In this first article the first stage will be developed since it will definitely influence the development of all subsequent work: the approach and objectives
Closely related to cost management are tools such as process reengineering, staff resizing, "outsourcing", benchmarking, strategic positioning, etc. although all these tools will be covered in later chapters.
On many occasions, mainly in small and medium-sized companies, the first questions that managers / entrepreneurs ask themselves are:
- What will the profitability of the project be? Will the amount of resources that will be used be profitable for the results that will be obtained?
Therefore, the first thing to consider before developing a cost management system is the balance between the cost of developing the project (in terms of time of its development, dedicated internal resources, technologies and necessary computer systems, external consultants, efforts, etc.) compared to its results.
In other words, cost management (both at an operational and strategic level) is very important and in many cases critical, but in SMEs sometimes more resources are invested in their development than the results actually obtained, although it is also common to see the case On the contrary (invest few resources for the importance of the project).
Therefore, the first step is to define the scope of the project and the resources to be invested.
At one end, the most complex, we would have from an activity-based abc cost system integrated with ERP information systems and the concepts of Theory of Limitations (TOC). This option, of course, requires a large amount of resources for its correct development but very tight results would be achieved.
At another extreme, fifteen days would have to be devoted to the project in which with a “bird's eye view” description of the processes and financial statements, a simple cost structure was defined. This method leads to a very poorly adjusted approximation of costs.
In the first case, an in-depth analysis of the business processes must be carried out to determine the costs from there. In this analysis, the organization's processes, the operating times, resources of each process, its inputs and outputs, non-quality costs, non-productivity, etc. should be defined.
In addition, on some occasions it is necessary to develop scenarios and computer simulations of the organization's processes with different hypotheses.
Likewise, starting from the concepts of the theory of Limitations (TOC), it is necessary to analyze if there are critical resources as well as the allocation of said resources. You have to do an analysis like "If my organization is limited by a resource, how do I decide which of the products is more profitable based on the use of that resource?"
In both cases, for the strategic analysis phase, the tools are different and will be discussed in depth in other chapters.
In conclusion, organizations, regardless of their size, need cost management at both a strategic and operational level, it is essential for correct decision-making, although the resources invested in the project will depend on the objectives of the project, organization structure, sector. in which it operates, etc.
