Your overall budget should always be kept under control
A lot of businesses employ cost management plans for specific projects, as well as for the overall business.
This kind of process starts with planning and estimating costs to develop an estimate of the financial resources required to complete a project. Hence, if businesses do not plan and manage costs carefully, it can quickly lead to a project running over budget.
Cost is defined as the monetary valuation of effort, material, resources, time consumed, and the risk taken and the opportunity forgone in the production or delivery of a good or service. Cost management is the process of reducing operating or production expenses in order to provide less expensive products or services to consumers.
In other words, it is the process of management used to analyse production and justify its operations to keep costs low and manage expenses in the future.
Reasons to adopt effective cost management
Before any project is taken up, it is appropriate to define the objectives to avoid any kind of cost over-runs. A well-defined project helps in facilitating appropriate management of costs, making the project a profitable one. Through cost management, unexpected costs can also be appropriately dealt with, as and when they occur.
It also helps in controlling the project-specific cost, in turn also the overall business cost. One can predict future expenses and costs and accordingly to work towards the expected revenues. Predefined costs can be maintained as records for the business.
It helps in taking those actions that are necessary to ensure that resources and business operations aim at attaining the chalked objectives and goals. It helps in analyzing the long term trends of the business.
Tips and techniques of CM
Capitalize on technology: The latest in technology helps in getting quality of higher standards, with higher productivity and keeps the employee count within the desirable range. All of this very strongly reflects in the overall cost of the business.
Time management: It is essential to make the employees understand the value of time and how to be efficient, to do more work in the same time span.
Inventory management: A major cost, but also a way of generating revenue, is through inventories. First and foremost, one needs to chalk out the inventory requirements, the quantity check that needs to be stored, and vendor costs, as all of this helps in knowing the requirements of the business and helps avoid stocking excess inventory.
Outsourcing: Outsourcing helps take employees on third-party roles, especially when it is for one time projects. This saves the employer from taking the cost onto his books. This is definitely done keeping in mind that the outsourcing partners are of the standards that do not hamper the quality of services to the customers of the business.
Updated market sense: It is very important to be updated with market trends, as it is a game of survival of the fittest. One has to be constantly in touch with the vendors and see that a renewal of contracts keeps happening with the trend in prices. This will help in negotiating for the best prices available.
Control of headcount
The second-most important cost to a business is the employee cost. Although we take employees as assets or the backbone of the business, one needs to keep in mind that they also have a major cost associated with them. Besides the regular salaries and bonuses, the workplace, licenses, and software needs are additional costs added per employee.
That is why it is essential that the manager knows how to reduce the employee costs, either by taking a reduced number of people, or by taking more low-cost employees rather than high-cost ones.
Plan for the unexpected
Pricing is not set in stone, and any good budget is going to take this into account by allowing for a range of costs. Expecting the unexpected might sound silly, but you must have room in your budget for a weather event, personal issue, or some other unknown that will delay the project.
There can be legal issues, penalties associated with the project, or unexpected labour costs, all of which, as a business, you cannot accurately budget for, but should have provisions for.
Having software to monitor the budget as businesses execute the project is key for managing costs. Some may think smaller projects do not need project cost management, however, small or large, there is always the need to manage costs. Also, regardless of how a business discovers a discrepancy in project costs, the authority must act immediately.
Every company wanting to remain profitable over the long term must spend a considerable proportion of its time attending to cost management activities, and implementing a cost management structure for projects will help a business keep their overall budget under control.
Taslim Ahammad is an Assistant Professor, Bangabandhu Sheikh Mujibur Rahman Science and Technology University (BSMRSTU), Gopalganj, Bangladesh.