The Importance of Cost Management for Your Business

Mon, Sep 17, 2012


Regardless of what type of business you run, keeping a close eye on your bottom line is more important than ever. The recession has forced most people to cut back dramatically, which has resulted in significantly less consumer purchasing. Yet the costs of doing business continue to rise. If you don’t keep tabs on cost management, you’ll soon find yourself closing your doors. The key is starting out with a clear picture of all of your costs, which then allows you to control them. And when you take that information and compare it to your competitors, you’ll have a great idea of how healthy your company will be over the long term. Here is a quick look at the importance of cost management for your business.

Cost management means you are maintaining control of the amount of resources you are expending in order to create a product or produce a service, deliver it to the customer and receive a sale. But these costs involve much more than simply the price of raw materials or the monthly rent for your store. To truly handle cost management for your business, you must become familiar with each and every cost that goes into your day-to-day activities.

The first, most obvious aspect is the cost of sales. Under this heading are any of the elements that you can allocate to the product or service being sold. That means direct costs, such as labor, parts or other stock materials. Anything you have to purchase that creates your product, and any of the people you must pay to manufacture those products, are filed under cost of sales.

Indirect costs must also be managed. These costs cannot always be directly linked to a specific product or service, but they are a real cost of doing business. Consider things such as the monthly utilities for your store or office, business and liability insurance, and any regular maintenance of your computers or machinery to be indirect costs. The reason you need to include these in cost management, and keep a handle on them is because you’ll need to allocate these costs with a specific method that you maintain over time. Otherwise you’ll find yourself over budget, which could be your company’s death knell in this economy.

Consider the type of company you run when separating out your indirect costs. If you run a business centered on merchandising, you’ll probably need to prorate the indirect cost based on the amount of items you sell each month, and reserve the remainder for your current inventory. If your business is in the service industry, chances are you’ll need to allocate the indirect costs based on the amount of hours worked in a given month. If your business is manufacturing, you’ll probably need to allocate these costs in a manner that takes depreciation into consideration, amortizing rent, utilities and equipment costs over the months and years. You could choose to handle it in an even more precise manner, which follows tax law, but again you’ll need to make these decisions at the outset to really maintain a clear picture of your costs.

These are just a few of the costs you will come across in your company, so take the time to ferret out any others that aren’t readily apparent. Once you have the full tally you’ll be able to budget your business more accurately. It will help create a proper forecast of revenue, which in turn will make it easier to attract investors and more difficult to take a devastating wrong turn that sinks your business. There are several automated cost management solutions on the market, so take the time to find the system that best fits your business, and implement it in a consistent manner to help guarantee success.

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