Cost management is the process of planning and controlling the costs involved in running a business. Looks simple, right? However, looks can be deceiving! Costs are one of the principal factors in determining whether a company will succeed or fail. But don’t worry, we’re here to help! Here, we’ll discuss everything you need to know about cost management.
Three Important Things You Need to Understand
1. Cost management must be conducted BEFORE beginning on a large project.
2. You need to monitor your costs continually as the project unfolds.
3. Go over your costs after the project is completed and then compare your results to your initial estimates.
In essence, cost management is the process of completing a specific project within a specific, pre-approved budget. So stick to your budget! When managers fail to adhere to their specified budgets, they run the risk of losing their job. You need to keep a close eye on all of the revenue streams you are responsible for, including cost management (per project), while also keeping track of the company’s bottom line. If you can keep control of those two, you’ll be sailing on smooth waters.
4 Steps in Cost management
1. Make a plan/schedule.
2. Estimate all of your probable future costs.
3. Create a budget.
4. Stay within that budget.
These steps were designed to be as simple as possible. Simplicity is key in the business world. If you cannot simplify something so that even a child can understand it, then you probably do not fully understand it yourself. Just a rule of thumb.
Now, let’s break down our four steps:
Making a Plan
Carefully plan your expected use of resources. Make a list of all of the materials you will need to finish this project, such as equipment, labor, materials, time, etc. Write down all of the possible items you may need. The worst mistake here is forgetting to budget for a very costly item, like your employees’ salaries!
There are several ways you can estimate your project’s potential costs. One way is through the use of “parametric models.” These are mathematically represented models, through computers. This is highly recommended. Use Microsoft Excel whenever possible, this is an industry expectation.
Budgeting your Costs
Get all of your future costs in order. Budgeting your costs needs to go hand in hand with your project schedule.
This is where many managers seem to lose their jobs. When it comes down to it, a business is defined by its ability to manage its profits. It needs to allocate those profits into different projects that are basically investments in the future. Can you stay within your costs? Were your initial estimates accurate, or at least close? I have seen people lose their jobs for the smallest of reasons. Losing money (or spending too much) seems to be a reoccurring trend these days.
Important Concepts in Cost Management
Know Your Business – This is an inward-looking version of Know Your Client (KYC). The most important thing a good manager needs to control company costs is an in-depth knowledge of the company itself. In this post, the US-based strategic consultancy, McKinsey, discusses five ways to control costs. If managers lack sufficient insight into the basic metrics of their operations, they will be unable to control their costs effectively. However, remember not to go too far, cost-cutting needs to be an important part of your business strategy while remaining subordinate to it.
Value Engineering – This is a fancy word for, “do the project for less.” Plan your costs ahead of time, and then find ways to cut costs without sacrificing the value of your project.
Life Cycle Costing – Simply put, all things created on Earth have a life cycle, even your project! So, how long will your project last? How much will it cost to repair or replace your project when that day comes?
6 Ways to Cut Your Costs
1. Watch your bottom line
Talk to your team to see what they think is being wasted on a daily basis. It may be something as simple as, “we are using too much paper!” to, “I think we only need two company vehicles, not three.” Your employees/team use a lot of supplies on a daily basis, and they’re the one’s who best understand their usage. Just think, cutting back by one package of white printer paper per week will save you $520 per year!
2. Hire interns
Interns are amazing. They are smart college students who are willing to work for free just for the experience. Take advantage of this while keeping in mind what is best for these young people at the same time. The mind of a college student is as moldable as a sponge. Hire some interns and teach them what to do! You will be amazed at what they can (and will) accomplish!
3. Look for a change of scenery
Rent is a huge expense when it comes to business ownership/management. A normal commercial space can cost thousands of dollars per month. Why not find a better location at a better price? Saving just a few hundred dollars per month can save you thousands per year!
4. Get rid of your phone
Get rid of your pricey and bulky phone systems and replace them with Skype or Google Hangouts, two free online applications which include messaging, video chat, SMS and VOIP, and, just importantly, are free! Proper cost management requires constant attention t to possibilities for finding new ways to reduce costs. Switching from fixed telephone lines to VOIP is an easy way to reduce costs quickly.
5. Take advantage of contractors or freelancers for specific tasks
Instead of hiring full-time employees for every task that your company needs to accomplish, there are a number of different ways to hire contractors on a per job basis, and at a fraction of the cost! These contractors/freelancers can be hired for a range of activities that are tangential to your business operations. These individuals or companies are located all over the world and can be easily found through such sites as Upwork, Fiverr and Workana, which are global or regional platforms for freelancers of all types.
You can easily find competitive pricing and excellent professionals, and they only get paid after they finish their work. Online reviews, like on Airbnb, help you find the best professionals to help you complete your projects, without the costs associated with hiring full-time employees! However, remember, freelancers, are best used for tasks that are not central to your company’s operations. A focus on cutting costs should not necessarily turn into a focus on reducing your headcount, as the Harvard Business Review discusses in this timely article.
6. Learn to manage your team’s time in the most efficient way possible.
Time management is the process of organizing and planning how to divide your time between specific activities in order to accomplish your goals in the most efficient manner possible. The principles of time management can easily be applied to your company, as well as your personal life. We all have so many things to do in our day, between our family, friends, chores and hobbies that it is easy to get bogged down and fritter away time unnecessarily. It’s the same thing in companies! Our days are so demanding, and so full of conflicting needs that proper management your time, and that of your employees, can make an immense difference to your bottom line.
7. Combine forces!
Contact some of your competitors and other businesses in your area and combine your purchases in order to increase your collective negotiating power, by buying a large amount of supplies at one time. You’ll see your per unit costs drop dramatically. Remember, bulk = less money. So, join forces whenever you can by selectively working with your competitors.
Cost Management is something that can make or break you as a manager or executive. Your job is to manage all the money and people in the company. So manage them! Take control! Not many people in this world are cut out for management for a good reason; they are unable to control costs or manage people effectively. Cut your costs, make well-thought-out plans and be creative!
Here is a great tip that no one will ever tell you. “There are two kinds of jobs in this world. Jobs where you are ordered what to do, and jobs where you have to solve someone else’s problems. The MOST money to be earned is in solving other people’s problems.” Make your job about solving other people’s problems, whether they are your bosses or your clients.
Runrun.it offers a practical system that helps you control your costs, gather the most pertinent metrics for understanding your operations and manage your time, prioritizing workflows and dramatically increasing your productivity. Sign up for a free trial today and learn how to make time work for you: http://runrun.it