What is Effective Cost Management?
Are you familiar with the costs that are associated with every aspect that you oversee, whether it is in your home or at the office? Do you truly understand the financial impacts of every decision that you make? Healthcare! Transportation! Travel! Insurance! Energy! Overhead! These are just a few of the costs that companies as well as individuals and countries face. These costs are constantly rising, forcing all of us to become more cost conscious. Effective cost management has therefore become a necessity to those of us with limited financial resources. So what exactly is effective cost management? Effective cost management is the process of implementing effective strategies and providing the resources and process discipline needed to enable and ensure the highest level of productivity, reliability and quality at the lowest possible costs. Most people think of cutting costs when they think of effective cost management; however, cost management is more about optimizing performance than it is about actually cutting costs.
The Seven Principles of Effective Cost Management
There are seven main principles of effective cost management. If these principles are implemented properly, they become the key to a running a successful business.
Determine clear and consistent performance objectives
As stated earlier, the process of managing costs efficiently is a strategic as well as an operational process. It starts with setting out clear and consistent performance objectives that are focused on finding and correcting the underlying causes to ineffective cost management.
Provide the tools and knowledge needed to succeed
If costs are to be managed effectively, those in charge need to know what the specific cost drivers are. This means that specific tools need to be in place to help them determine this. In addition, they need to be given insight on the specific processes and day to day activities so that they can identify opportunities for effective cost management.
Understand the buildup of standard costs
Every process within a company, home or country has standard costs related to it. These costs are a very important aspect of the organization. They are the basis for decision making and should be understood properly and identified by all in charge.
Determine relevant and valuable costs
In order to effectively manage costs, you need to find out which costs are relevant and valuable to the daily processes and activities. This means that you need to take a questioning approach to every cost. Some questions that you should ask yourself to do so are:
Do the costs related to this activity create or maintain sales?
Do they improve margins?
Do they improve the quality or productivity?
Strive for Excellent Performance
Everyone who is an active participant of the cost management strategy should always strive for excellent performance.
Get commitment from all involved
Everyone involved in the effective cost management process should be fully committed to the process. They should be willing to take the necessary steps and procedures to see the successful implementation of the effective cost management strategy. In addition, those in charge should understand that the decisions made by them can either increase or decrease costs.
Finally, the best strategy is to always plan ahead as effective cost management is all about being proactive instead of reactive. You should be able to anticipate opportunities for improvement before they present themselves.
Importance of financial consultants in cost management
There are so many intricate details to effective cost management, so of which will be very easy for you to understand and implement. However, certain aspects of effective cost management will require specific knowledge and expertise. This is why it is always important to get advice and guidance from financial as well as tax consultants before the implementation of your cost management strategies. These professionals have the knowledge and expertise needed to make your strategy as effective and efficient as possible. Furthermore, they also have knowledge and insight on government regulations which can affect your strategies in a negative or positive manner.
Cost versus value
In conclusion, at the end of the day, it is very important to understand the relationship between cost and value. The decisions that you make should take both cost and value into consideration. If the value created by engaging in a specific activity is higher than the costs caused by that activity, it is advisable to engage in that activity. It is however never recommended to engage in an activity whose costs are higher that the value that will be created by that activity. This is known as the cost-benefit principle and it is a principle that should always be considered in all cost management decisions.