cost management

Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget. Many businesses employ cost management plans for specific projects, as well as for the over-all business model. When applying it to a project, expected costs are calculated while the project is still in the planning period and are approved beforehand. During the project, all expenses are recorded and monitored to make sure they stay in line with the cost management plan. After the project is finished, the predicted costs and actual costs can be compared and analyzed, helping future cost management predictions and budgets. Implementing a cost management structure for projects can help a business keep their overall budget under control. Several business intelligence (BI) programs, such as Oracle Hyperion, offer cost management software to help businesses monitor costs and increase profitability. While the software may help, it is not imperative that software is used when executing a cost management plan. Vendors may refer to cost management software applications as cost accounting, spend management or cost transparency products.

Cost management is the process by which companies control and plan the costs of doing business. Individual projects should have customized cost management plans, and companies as a whole also integrate cost management into their overall business model. There is no single accepted definition for this term, because it has such broad applications and possible strategies. When properly implemented, cost management will translate into reduced costs of production for products and services, as well as increased value being delivered to the customer.

For a company's management to be effective overall, cost management must be an integral feature of it. It is easiest to understand this concept if it is explained in the context of a single project. For instance, before a project is started, the anticipated costs should be identified and measured. These expenses should then be approved before any purchasing occurs. During the process of completing a project, all incurred costs should be noted and kept in a record of some kind, to help ensure that the costs are controlled and kept in line with initial expectations, to the extent that this is possible. Taking this approach to cost management will help a company determine whether they accurately estimated expenses at first, and will help them more closely predict expenses in the future. Any overspending can also be monitored in this way, and either eliminated in future projects or specifically approved if the expense was necessary. Cost management cannot be used in isolation; projects must be organized and tailored with this strategy in mind. Starting a project with cost management in mind will help to avoid certain pitfalls that may be present otherwise. If the objectives of the project are not clearly defined at first, or are changed during the course of the project, cost over-runs will be more likely. If costs are not fully researched before the project, they may be underestimated, thereby inflating the expectation of the project's success unrealistically. Construction projects are subject to their own particular challenges; these can include constraints in the form of laws and regulations that must be planned around. If the project is completely and clearly defined, this will facilitate effective management of the costs it will incur. Effective cost management strategies will help a team deliver a finished project within the allocated budget, while also making it as valuable as possible to the company. There is always the possibility of unexpected costs, but preparation in the form ofcost management will likely make them much easier to deal with when they occur.

How Do I Develop a Cost Management Plan?

A cost management plan lists the details of expected expenditures for a project. Companies may prepare these plans for other areas in their company as well, depending on its purpose. To develop a cost management plan, the company's management team will identify activities that produce costs, list the materials needed for the project, develop a timeline for the project, and state the metrics used to measure costs and any resulting variances. Other items may be on the plan, depending on the size and scope of the project. Identifying cost activities is necessary to ensure the company details all areas it expects to incur expenditures. On production-style projects, these costs typically include the materials and labor necessary to produce the good. Service-based projects will have a different focus, however; the company must identify areas like customer service, delivery, ancillary services, or other indirect areas that will add costs to the project.

Listing materials is necessary for a cost management plan as most companies will prepare budgets with this information. Many cost-based projects are taken on at specific times during the year. Companies will have a budget limit for these projects and typically accept one or several that meet the cost restraints listed on the cost management plan. The company may also adjust the plan in order to complete more projects within the stated budget. Companies will also need to detail how they will track costs associated with their plan. This may include tracking the cost of materials and labor used on the project by stating actual costs. Incidental items may require different measurement techniques. For example, if a company expects to use workers from a separate department on the new project, it may use a percentage to calculate the corresponding cost. The cost management plan may state 25 percent of labor from the IT department will go against the new project. Other items to include on the cost management plan include a timeline and variance analysis for the plan. The timeline helps avoid cost overruns and ensure that projects remain profitable; in some industries, such as construction, timelines are necessary in order to get paid. This process helps offset the early costs incurred in the project management plan. Variance measurements are also necessary to determine why a cost management plan may have a cost overrun. Companies can then compare the plan against actual expenditures and determine the reason for any differences between the two.

What Are the Best Strategies for Effective Cost Management?

Creating and following an effective cost management plan is important for just about any business. While the specifics of the plan will vary based on the size and type of business involved, there are a few basic approaches that will be part of any type of viable cost management initiative. By considering factors such as the setting of clear and concise objectives, accurately assessing the true costs associated with running the operation, and educating all personnel regarding the management of anticipated expenses, the chances of successfully developing a solid cost management place are greatly enhanced. Cost management often begins by identifying and setting objectives. Those objectives may be somewhat broad, but they also should be easy to grasp and to relate to every financial transaction that takes place within the operation. For example, a company may have an objective of keeping operation costs within a given range. In order to do this, understanding how to implement that objective by making sure each staff position is necessary, and eliminating waste of resources in the production process is important. The right objectives help to set the goal but allow everyone to participate in identifying specific procedures and activities that will make it possible to achieve that goal.

Along with objectives, effective cost management also means developing an understand of the true cost associated with each activity conducted by the business. This includes identifying the purchase price of necessary goods, but also the transportation and delivery costs associated with the transaction. If the purchase is made using credit, factoring in the cost in terms of interest is also key to determining just how much those purchased goods cost the company. By understanding the true cost, it is easier to determine if the purchase will result in a satisfactory level of returns over time, or if a different approach to the purchase would be in the best interests of the company. In order to set viable objectives and to determine the true cost associated with purchases, it is imperative that everyone involved with the operation understand how and why resources are managed in a specific manner. By helping everyone to have some idea of the negative impact that waste has on the business, including its ability to offer benefits and higher wages or salaries, employees are more likely to work with managers toward developing procedures that are in line with company objectives and actually following through with those policies and procedures. This approach of involving everyone in the cost management initiatives has the added benefit of helping to create greater harmony within the workplace, which in turn may aid in increasing productivity, since everyone perceives a vested interest in the ongoing operation of the company.