There are many reasons why a business can fail. However, one of the most logical and common factors is the inability to control expenses. This inability is triggered by the lack of a cost management strategy.
Today, the world is confronted with a new problem — the pandemic of coronavirus. In such a situation, proper cost and risk management strategies become even more crucial. So, businesses are now rushing to develop them from scratch.
And although many understand the importance of controlling their cash flows, not everyone is ready to invest in developing an accurate cost-management plan. Someone is ready to launch a finance app development particularly for his\her business, but it is not enough.
In our article, we will try to explain why cost management is so important. And also, we will give some tips on how to develop the most suitable cost management strategy for your company, using auxiliary tools.
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Why is proper cost management important?
In simple terms, cost management is about allocating your budgets to the right projects, at the right time, with predictable expenses and income to maintain a positive balance. Let’s also list some of the factors why it is so important:
- Direct influence on your business’ success. A successful business is a company that generates income and efficiently uses its resources. Cost management allows you to create a branched strategy of how and where you will spend your money, human and other resources.
- Risks minimization. Cost management is tightly connected with risk management. This is a kind of scientific approach that allows you to accurately determine the sources of possible risks associated with your budgeting and predict their behaviour. Also, cost management allows you to develop the most appropriate solution to any crisis. This, again, is well seen in the example of various companies facing a pandemic.
- Top management’s best source of advice. When considering a cost management strategy, any manager can spot potential problem areas. The manager will be able to evaluate the most important factors and numbers, weigh the risks, and fit a new vision into the updated cost management plan. Also, this will allow managers to efficiently redistribute resources to cover the most important areas.
- Resource optimization. Often, a business fails not because of a lack of money, but because of its misuse. Cost management is a series of measures that will help you to optimally allocate all your resources.
Now, let’s look at some tips to help you create the most optimal cost management strategy.
Tips on developing a proper cost management strategy
Of course, cost management is something unique for every particular business. However, there are a few basic tips that are universal. Let’s list them.
Design a Work Breakdown Structure (WBS)
Such a structure begins with the definition of global goals and then branches out into smaller manageable sectors. Each sector is managed separately but remains part of a global system, where the dependence of processes on one another is traced. Remember to set a budget for each sector. In essence, WBS divides the company’s overall workflow into smaller branches, which are much easier to manage and predict.
Calculate all possible expenses
We are talking about creating a cost classification system. You are unlikely to be able to accurately predict how many resources you need, it is impossible. Therefore, your task is to create a situation, when you can predict the maximum amount of your spendings. Hours, payments, salaries, taxes, rent, delivery expenses, and so on — these are all part of cost classification. It allows you to create cost templates for various projects and apply them to tasks, discarding everything that is not needed.
Use all available experience
Perhaps you, or someone from your team, have already encountered similar tasks or projects. Use the insights on how much was spent on a particular project, what were the costs of maintaining the staff and so on.
Assess the possibility of redundancy
A classic example of redundancy is a situation in which two employees are working on a task that could be carried out by one person. You can also consider unnecessary overpayments for any services. If you can predict and avoid redundancy, your cost management plan will be effective.
Decide how you will evaluate the success
Any positive changes in the work of company structures should be measurable. Define clear indicators that will point out the profitability of each sector and make sure that work progress does not fall below a certain level.
Use all the necessary tools
Software tools are the best helpers when developing and maintaining a cost-management strategy. Here are some of the best options available:
Jira. This is an agile tool that includes all possible options for project management, including cost management. It’s very convenient to work with, so professionals recommend it. Jira may seem overpriced, but only for those who have never used this tool before. It is one of the most popular Atlassian solutions on the market.
Hubstaff. This is not just a time tracking application, but a whole system aimed at the most effective interaction between the structures of your company. Hubstaff allows you to track time remotely and can determine GPS location. Also, you can manage projects here. This is achieved through integration with more than 30 other tools such as Trello, Github or Paypal. The latter helps to invoice, create reports for customers, and control any other payments.
Avaza. Project management, planning, resource distribution, cost management, and time tracking are included in one application. Avaza is a cloud-based app. It is available for all devices and helps companies focus on maximum efficiency. All the main areas of work that we identified at the beginning can be managed simultaneously or in separate modules. This allows your team to focus on one specific task such as invoicing.
Tempo. That’s another solution from Atlassian, specifically aimed at cost management. It allows you to control the scale of the project, investments, and expenses in real-time. The tempo is a convenient dashboard, divided into several main parts, where you can create a general financial forecast, control project costs, ROI, salaries, and other payments.
Cost management is a powerful tool to increase the profitability of your company. But, no profitability can be achieved if no customers are willing to pay. Meeting their needs should always remain at the head of any strategy. You need to understand how to make the process of solving their problems profitable.
A well-developed plan is also a guarantee of new investments, as you can clearly show stakeholders where the money goes and how it works.
Finally, it’s good when corporate strategies are tied to real numbers and revenues. In such a situation, each team member can understand how their actions and work affect the profitability of the enterprise.