Cost management is a special segment of business and enterprise management whose focus is entirely on cost optimization, in order to maintain business competitiveness. It is a process of estimating, calculating and controlling costs over the life of the project, in order to keep expenditures within the planned budget or current possibilities.
A successful project has the following characteristics:
- Meets the set requirements and scope of work
- The quality of performance is at a professional level
- Completed on time
- Completed within the given budget or current capabilities
From the above, it is clear that cost management is one of the pillars of project management and implementation, and it is relevant regardless of whether it is about production, retail, technology, construction, marketing, tourism or something else. Namely, the importance of cost management is easy to understand on everyday examples, such as: if you have decided to build a house, the first thing you need to do is set a budget. When you get an impression of what the construction costs will be approximately, then you can divide the budget into costs related to smaller items and specific sub-tasks. According to the budget within which you are maneuvering, you will determine, for example, which architect, electrician or ceramicist to take; what quality of material you can require, etc.
These questions are impossible to answer without a pre-defined budget, and it is even less possible to track whether you are moving in the right direction from the moment the project came to life. This is especially true for large companies that are simultaneously implementing several projects through which unexpected, extraordinary costs are sure to arise.
Cost management is contained in 4 processes:
- Planning the cost management process
- Cost estimation
- Determining the budget
- Control costs
- Planning the cost management process
Planning the cost management process
This is a step in which you plan how to budget, estimate costs, and learn how to manage costs, whether regular or extraordinary. In this step, therefore, you will describe how you will manage your costs and budget.
Each planning is also a process of simulating future activities and their “architecture” with the aim of realizing the plan. Careful cost planning certainly determines the scope of activities depending on the set goal. If we plan to invest minimal funds for marketing and sales in the process of breaking through and placing FMCG products on the market, we are certainly doomed to failure. On the other hand, if we reserve too much money for non-functional costs (eg for general affairs, maintenance, etc.), it is possible to make it difficult for us to access the target market.
If we consider that the cost estimate includes cost estimates for each project activity and the tools, materials and processes, as well as extraordinary costs, it is clear that in this job engage exclusively with extensive experience and knowledge in this area. Of course, it is very difficult to evaluate each item with 100% certainty, but this is certainly a training of our competencies and knowledge of our business. If you are not able to estimate how much it costs you to develop a product or service with which you want to take additional market share, cover a particular sales channel or increase profitability, it is likely that you will not succeed and should revise your knowledge and competencies.
The following are several cost classifications according to:
a) Production costs
b) Non-production costs
- Position in financial challenges
a) Overdue and overdue expenses
b) Primary and conversion costs
- Behave according to the level of activity
a) Fixed costs
b) Variable costs
c) Mixed costs
d) Discretionary costs
- Possibilities of their control
a) Controllable costs
b) Uncontrollable costs
Determining the budget
After conducting estimates and a combination of estimated costs, the total budget of the project is determined. Based on this, it is possible to monitor and control the performance of the project.
The only question here is how the budget will be determined – whether as a set of individual items according to which finances will be provided (own funds, loans, investors) or from the total amount of budget you have at your disposal, items will be budgeted according to the assessment of importance for achieving the goal.
Control costs are the last item of cost management. It refers to measuring deviations from the basic budget and taking measures to minimize costs. When information on actual costs becomes available, the result of that “undershooting” or “overshooting” plan is analyzed as well as the cause of deviation from planned or expected.
Some of the methods used are:
- Benchmarking – scanning companies that are leaders in their field and comparing their business processes with the processes of our own company,
- Achievement comparable to a certain period of time,
- Realization of the index in relation to the given goal and
- Realization of absolute amounts and revision of the same
Namely, we are witnessing the changes that globalization has brought with it. One of the basic changes in entrepreneurship is a huge increase in competition and a shorter product life. This leads to a constant need to develop and improve competencies in cost management. Because ultimately, the goal is to achieve the lowest possible costs with the optimal volume of production or business activity so we can give maximum output in line with the market. And only those who are willing to “roll up their sleeves”, listen, believe and implement the most optimal cost management models will surely find their long-term “place under the sun”.