The decisions and actions undertaken by the owners and managers of a company must have as a first and fundamental objective to achieve the highest Net Present Value of the future flow of income of the organization. This implies the search for sustained returns in the medium and long term as opposed to the search for income in the short term. Although some experts maintain that the sum of short-term objectives leads to the same and / or better results than the long-term objectives, the various short-term plans should have a high degree of coordination in order to avoid contradictions, something very usual in this way of acting.
Achieving the highest Net Present Value implies achieving a higher flow of funds, something that can only be achieved by improving the ratio between costs incurred and income from derivatives. Instead of reducing total costs, it is about reducing costs for each monetary unit entered by sales; Thus, if total costs of $ 350,000 are incurred to generate income of $ 855,800, we would have a ratio of 0.409 (that is, for each unit of income, 0.409 costs are incurred).
Many propose to cut costs outright, leaving aside the effect on income, and on productivity levels, and what is more considering only the total cost and not the productivity of the costs incurred. The question does not go through the costs that have been incurred, but in the effectiveness and efficiency in the use of resources. Total costs can and should increase, if such an increase brings with it a more than proportional increase in revenue.
|
Total Costs |
Sales |
Ctos.Tot. / Sales |
Var. % Ctos.Tot. |
Var. % Sales |
|
$ 350,000.00 |
$ 855,800.00 |
0.409 |
||
|
$ 340,000.00 |
$ 855,800.00 |
0.397 |
-2.86% |
0.00% |
|
$ 340,000.00 |
$ 815,000.00 |
0.417 |
-2.86% |
-4.77% |
|
$ 425,000.00 |
$ 875,000.00 |
0.486 |
21.43% |
2.24% |
|
$ 425,000.00 |
$ 1,050,000.00 |
0.405 |
21.43% |
22.69% |
Achieving a higher return implies incurring lower costs for each monetary unit generated as income. In this way and based on the table above as an example, it can be clearly observed that if total costs decrease while sales remain constant, this will lead to an improvement in the “Ctos.
Totals / Sales ”, something that also happens when the increase in sales exceeds the increase in total costs in percentage terms. The same is not the case, and this is therefore a reason for an increase in the relationship "Total Accounts / Sales" (a worsening of the situation) in cases in which the percentage decrease in total costs is less than the percentage decrease in the sales, or the percentage increase in total costs is accompanied by a lower percentage increase in sales.
A radical improvement in the way of analyzing the productivity of organizational activities and processes leads us to the option of negative increases in total costs accompanied by a percentage increase in sales.
|
Total Costs |
Sales |
Ctos.Tot. / Sales |
Var. % Ctos.Tot. |
Var. % Sales |
|
$ 350,000.00 |
$ 855,800.00 |
0.409 |
||
|
$ 340,000.00 |
$ 875,000.00 |
0.389 |
-2.86% |
2.24% |
With this, a fundamental question is clearly exposed: when it comes to improving the yields and profitability of the company, it is not only important to reduce the production costs of goods and services, but also to make sales and administration activities more productive.
Many authors state that reducing costs generates greater and better results than increasing sales, arguing for this the need to increase the costs incurred in the same proportions to generate greater income. Well, this is not the case, since sales can be increased in certain proportions without incurring equal proportions of increase in costs.
The first step is to calculate the total costs incurred for each monetary unit obtained as sales. The next step is to disaggregate for the analysis the total costs by function, activity and processes in relation to total sales, sales by product line, by branch, by branch. In this way we can have the "total advertising costs per monetary unit of sales"; the “total administration costs per monetary unit of sales”.
In principle, it can be said that it is not a relationship other than the well-known “concept of costs in relation to sales”. What changes is the optics or way of seeing the issue. It is not about knowing how much each cost or expense represents based on total sales, but what costs we must incur to generate a monetary unit of sales.
In this way, the approach is no longer to cut costs to improve the relationship of costs based on sales, but to improve the productivity of the resources used in such a way that even an increase in total costs accompanied by a higher percentage increase in sales will generate an improvement in costs per monetary unit of income.
Improving the performance ratio for each relationship by product, activity, sector, etc., will involve an analysis of the development, operation, content and needs of each activity. For this analysis, the following methodologies, among other methodologies, should be considered:
- Analysis of Quality CostsAnalysis of Added Value by ActivityParetian AnalysisRoot Cause AnalysisAnalysis of Activities and ProcessesRevealing and Evaluation of Internal ControlMatrix of Activities "Need - Productivity" Detection and Elimination of Waste
- Quality Cost Analysis. Its purpose is to determine the costs assigned to: Prevention, Evaluation, Internal Failures and External Failures. The objective is to reduce expenditure on Prevention in order to eliminate failures (internal and external) and reduce evaluation needs, in order to generate significant reductions in total quality costs (or "lack of quality". Analysis of the Value Added by Activity. It responds to the need to evaluate the value added by the various activities and processes of the company for both the end customer and the company. Thus, once the activities that do not generate any added value have been identified, they must be systematically eliminated. While internal activities should be carried to the lowest possible relationship between costs incurred and total income of the organization. All those activities that lead to greater satisfaction of end users, generating greater added value for them and therefore putting the company in a better competitive position in relation to its competitors, should be focused and refocused. Paretian Analysis. Its primary objective is to focus the analysis on the vital few, that is, the few concepts that generate most of the costs. In this way, work that generates lower yields is avoided, fully devoting efforts to controlling and reducing those costs of true and authentic significance for the company. The Pareto analysis also allows us to recognize the main factors of failures, unproductiveness and dissatisfaction, for the purposes of their subsequent correction and improvement. Root cause analysis.Its main objective is to detect the fundamental cause that originates the different types of costs, expenses and losses in such a way as to avoid, prevent and eliminate their repetition. The question is not to treat the symptoms, but to start from the symptoms to arrive at the original reason that originate the various types of failures, errors, costs and losses. A fundamental method for this recommended by experts such as Karatsu and Imai is for each problem to ask five and up to six times the why of it. Activity and Process Analysiss. Through studies of "Bottlenecks", Critical Path and the "Six Master Questions" it tends to find shortcomings, duplications, unproductiveness and in general lack of efficiency. The "Six Master Questions" comprise the What ?; the WHO?; the how?; The when?; where? and why? corresponding to each of the previous answers.In such a way, unnecessary activities are discovered, tasks in charge of people with capacities superior to those required and therefore wasted, inefficient or directly unproductive work methods, places of development that are not very convenient depending on the to the general process of the operation in question, inadequate execution moment, among many other issues, which leads to the possibility of eliminating, combining, changing the order or simplifying activities and processes.Survey and evaluation of internal control. Improving internal control does not only imply avoiding internal fraud, but also improving information systems, avoiding fraud by outsiders to the organization, avoiding legal breaches, protecting against various types of risks (monetary, exchange rate, political, etc.). For this, organizational structures must exist and function that serve as a framework for action and detection of strengths, weaknesses, opportunities and threats. It is useless to improve the productivity of the company's productive and commercial operations, if the fact of not evaluating exchange or monetary risks, or incurring deficiencies of a contractual or tax nature, lead the organization to the systematic loss of resources.Needs and Productivity Matrix. It leads to constantly evaluating the various tasks, activities and processes, in order to assess their degree of need, their possible outsourcing, and if necessary and carry it out internally, the possible improvement in its productivity. Waste detection, prevention and elimination. Systematically detecting and eliminating the various types of waste or waste leads to continuously improving the profitability of the company thanks to the consequent improvement in quality levels, productivity, cost reduction, response times and improvement in customer satisfaction and consumers. All of this is reflected and leads to better sales levels, greater market share, lower financial costs, energy savings, less use of physical spaces, fewer manpower needs, and therefore a greater flow of funds.
Improving the use of resources, making more profitable use of machinery and equipment, improving staff productivity, improving marketing performance are, among other aspects, questions of pure logic, as well as an undeniable need for any company that wants to compete. in today's markets.
Improving the ratio of each of the total costs as a function of partial and total income through the above methods is only one part of the question, the other consists of making the interrelation of the various activities, processes and functions more profitable, in such a way as to improve overall performance over individual performance.
It is to this aspect that the greatest attention should be concentrated, and it is for this that it is necessary, on the one hand, to understand the organization as a system, and therefore the need to think about it as such, and on the other hand to act in This results through teamwork, but not only teamwork understood as an attitude of the members of a sector, which tends to contradict the objectives of other sector groups, but also the work of the organization as a whole for the purposes of harmonize the objectives of the organization, involving all sectors and individuals in the fulfillment of the established goals. In this aspect, it is fundamentally important together with participation and teamwork, the management of incentives and staff motivations.
As a final conclusion it can be said that there is nothing special, but at the same time there is much special. Most see the movements, but very few see the reason for such movements. In other words, it could be said that what seems obvious is only obvious to the prepared mind. In areas and companies marked by traditional thinking, based on reductionist theories and concepts, led by linear analysis and mechanistic reasoning, the way to contemplate and visualize costs, productivity and the operation of the company goes through other edges. In a new area marked by organicist reasoning, a systemic approach and strategic thinking, the vision and points of view become diametrically opposed, as well as the results achieved.
Within this area, the need to change and modify the paradigms in relation to cost management and productivity is clearly fundamental. Wanting to operate companies today and in the future with instruments and based on theories far removed from what is now called the digital age can only lead to the failure of the company as an economic and social objective.
