Monetary evaluation of materials, labour, time, resources, and risk in the event of any production activity, delivery of goods and services or any project is defined as cost. Generally, there are five different types of costs involved in a project. They are direct cost, indirect cost, fixed cost, variable cost, and sunk cost.
Cost management is a process of planning and regulating the budget of a given project. It aims at reducing and restricting cost so that it does not spin out of proportion. Cost estimation, cost budgeting, and cost control are the three pillars of cost management.
Read on to learn more about cost management and its benefits.
Cost management techniques
Changes in government policies, geo-political situations, and an abrupt shift in demand-supply curves of certain raw materials deeply impact cost. The following are the proven cost management techniques -
- Inventory management
One of the most important cost controllers and revenue generators is inventory management. The number of materials to be stored and vendor costs should be optimised so that the projects get maximum cash flow.
- Outsourcing
This method helps a project maintain a steady cash flow since growth is initially dependent on third party cost. However, quality standards and time schedules are to be maintained.
- Time management
Time is money. So, managing time in a project or production is very important to avoid an overrun in cost.
- Headcount
Control of the number of people engaged in a project is crucial and needs optimisation.
- Ride on technology
The latest technology ensures higher quality standards with reduced cost, time, and resources.
- Risk management
Risk management is essential for an organisation to locate, assess and mitigate technical, strategic, financial, legal or security risks.
Benefits of cost management
All business houses use cost management tools to maximise revenue and reduce costs while maintaining committed quality standards. While accountants and financial analysts are the custodians, every team member is responsible for achieving the objective. The direct benefits obtained are the following –
- Improves visibility
Some cost management tools for cloud services provide real-time visibility into several cost management parameters with the help of model studies. These techniques use machine learning (ML) to suggest cost saving techniques by predicting behavioural changes.
- Offsetting risks
Cost management considers the potential risks in a new project and translates the same into cost, keeping the revenue or profitability of the business intact.
- Controls overspending
Since cost management chalks out a detailed project budget for all its benchmarks, it gives the project owner a shot in the arm to track costs regularly.
- Procurement value
Cost management also helps improve the procurement value of goods and services vendors offer. The project teams use decision analysis to strike the best bargain.
- Financial discipline
Cost management helps in financial discipline at large, which improves the cash flow of a project. Payment liabilities can be met timely, improving vendor efficiency. Client satisfaction is another by-product of cost management.
- Improves financial health
Cost management is an exercise that helps an organisation improve its financial health in the long run. This is achieved by recording data history of good project practices, better cost control and excellent decision making.
- Improves planning
For a new project, there is always a gap between the estimated or perceived situation and the real one. There may be a few parameters that do not work as they were expected. Thus, cost management also helps managers devise better plans for similar future projects.
- Long-term business trend
Cost management methods help us analyse long-term business trends optimising resources, time and raw materials, amongst others. Once a successful trend is set, it may be replicated for long-term usage. When an organisation carries out cost control effectively and consistently while maintaining assured quality standards, it becomes a benchmark for future reference.
- Encouraging savings
Cost management teaches a project team to identify unproductive financial leaks and plug them.
- Accountability
Cost management methods boost accountability within the team handling a project. They become aware and conscious that any delay or cost overrun should be controlled to ensure targeted profitability.
Conclusion
The career of a cost management consultant is promising. A CMA USA course can boost the prospects of a promising candidate. Working professionals with the required qualification and reasonable experience in this field may also appear for a CMA exam and become successful professionals in this field.
Enrolling in the Certified Management Accountant Course at Imarticus can give your dream the right path. The duration of the course varies from 6 to 8 months.
