The most essential element of successful businesses is tunring a profit. To stay profitable, you need to understand cost management. That means having a precise understanding of your budget and not overcommitting or wasting resources. Knowing your budget and how to control costs is especially relevant in project management.
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What is cost management?
Cost management is an accounting term that just means planning and sticking to a budget. Implementing a successful cost management strategy means accurately forecasting the amount you will have available, the amount you’re likely to need, and the amount you can afford to spend. Sometimes you won’t be able to spend the money that a project or process demands, which is why cost reduction strategies are part of cost management.
While it’s important to be flexible in case of a change, project cost management should always be planned ahead of time. This way, you can make sure all your expenses are necessary and in budget, and you’re able to compare actual and expected results.
Whether your cost control is for a project or the whole of your business, there are 4 steps to follow.
Resource planning
Before anything else, you need to know the resources invovled in your project or operations. Necessary resources include the people, materials, equipment, technology, and infrastructure involved.
Having this information requires you to outline every task and subtask from start to finish. You need precise answers to questions like:
- How many people are needed?
- What skills do these people need to have?
- What equipment and materials do these people need?
- What technology will be used?
This step is easiest when you draw from past budgets and projects, get feedback from stakeholders, consider the times certain resources are available, and determine which resources you don’t have available.
Cost estimation
An accurate idea of business costs depends on knowing which resources you’ll need. Once you have that, you’ll be able to calculate projected expenses by considering:
- The price of each resource, including wages and labor costs
- How long resources are needed
- Potential project risks
- Past costs and budgets
- Your company’s overall financial health
Estimation is the hardest part of cost management, because of the impact of inaccuracy. The greater the difference between your projected and actual costs, the less likely you’ll be successful. In addition to dealing with fixed costs, variable costs, inflation, overhead costs, and the value of time, you also need to choose a cost estimation model .
If you have past data available to compare and/or project managers have experience, a top-down estimation model makes sense. If you either have no experience with cost management or no prior budget data, use a bottom-up estimation model.
Cost budgeting
This is where you design your budget based on the resources you’ll use. Looking at your task breakdown, decide how much you’ll need to spend to accomplish each. Remember to account for any time-specific resources you’ll need money reserved for.
Another best practice for designing budgets is to set aside a portion of it in case unexpected costs arise. Having a defined budget is the only way to measure and continuously improve your cost management strategy.
Cost control
Unlike the other steps of cost management, cost control happens consistently throughout the project process. You need to regularly report on performance in order to detect and correct mistakes. Essential questions to ask as part of cost control include:
- How is project performance measured?
- What constitutes a deviation?
- What corrective actions will be taken in case of deviations?
- Which people/roles are the decision makers?
One of the most popular ways for businesses to assess their budget status is earned value management. In a nutshell, earned value management quantifies the value of progress made at various stages and weighs that against the actual cost of the project, though there are different ways of assigning tasks value.
7 common cost management mistakes
There are clear benefits to developing a cost management strategy, such as preventing overspending, enforcing reporting standards, and helping managers make data-driven decisions. But it’s also challenging to do cost management right, especially when you need to adjust projections. There are a number of mistakes businesses often make during cost reduction and management.
No outline
Outlining the structure of projects and tasks, called a work breakdown structure, is essential for resource planning. Being as specific as possible when creating objectives is the only way to determine the cost of meeting said objectives. Smaller tasks also help create benchmarks and keep your team focused.
Poor communication
In order to keep your costs under control, you need to be in communication with workers and stakeholders. Finances are communicated through regular reports. These reports also have to be standardized to avoid any confusion. If your data is formatted differently by different people, it’s easy to lose track of what’s going on.
Tracking status updates in one place gives everyone involved visibility and eliminates ambiguity. Updates should also be provided in real-time.
Using outdated data
Adjustments to a cost management strategy need to be made quickly when a problem is discovered. This is much harder if your team or stakeholders are operating using data that doesn’t reflect what’s going on. Inaccurate data can lead to over or under budgeting, and can influence how much companies spend on inventory management or other financial committments.
As with other forms of communication, financial data should be provided in real time if you want to avoid these errors.
Failing to change
While the perfect cost management plan would always be on budget, adjustments are realistic. When something happens that you didn’t plan for, you need to account for and manage the change. If you hit a wall and try to continue normally, you’ll wind up spending a lot more with no payoff.
Successfully making changes again depends on the availability and accuracy of data. Regular and stardized reporting is the only way of knowing what needs to change, or if change is worthwhile.
Neglecting employee training
Having access to key data is only half of the puzzle; the other half is knowing what to do with it. For that, you need people with the training to interpret this data. Having your employees take or obtain certification from an accounting course goes a long way towards interpreting your financial status.
Supporting employees by providing this training doesn’t only help you in the moment, it also contributes to an overall culture of improvement and employee development in your workplace. Encouraging your workers to grow helps you stay competitive.
Bad inventory management
You’ll have a much harder time completing projects or reaching financial stability without accurate inventory management. Part of cost management is knowing the resources required for each task, so you know what’s needed in your inventory.
Being aware of your stock keeps you from over or underpurchasing and helps you obtain exactly what you need. Overpurchasing can lead to wasted product and can drive up your costs, and underpurchasing can cause delays while you wait to restock.
Using manual processes
The two biggest issues with manual processes are that they are time-consuming and prone to error. By this point, there are countless solutions for automating routine tasks like data entry or document management – which is called workflow automation – and using one helps you control costs. Automation also creates consistency.
By saving time on tasks and avoiding errors, you’re helping yourself keep to your expected budget. Accomplishing repetitive tasks faster makes your workers more efficient and may even put you ahead of schedule. And data entry errors are particularly dangerous when it comes to financial matters. Misjudging the amount of money you have can lead to overspending or impact future funding decisions.
Cost management is made much easier with workflow automation software like Lumiform. With the ability to create custom checklists to address tasks, you can easily introdcue a standardized way of working. As each checklist is completed, the data gets securely stored in the cloud for everyone to access. You can also create your own checklists to manage business assets more effectively.
Data from completed checklists is turned into regular, consistently formatted reports, which are easy for stakeholders at every level of your organization to analyze. Abundant real-time data puts you in a great position to tweak your cost management plan when needed.
