What is meant by cost management?

What Does Cost Management Mean?

Cost management is the process of effectively planning and controlling the costs involved in a business. It is considered one of the more challenging tasks in business management. Generally, the costs or the expenses in a business are recorded by a team of experts using expense forms.

The process involves various activities such as collecting, analyzing, evaluating and reporting cost statistics for budgeting. By implementing an effective cost management system, a company’s overall budgeting can be brought under control.

Techopedia Explains Cost Management

Cost management is employed by many businesses as an integral part of business management. Cost management is also considered a form of management accounting that helps to identify future expenditures in a business to reduce budget overages.

When cost management is applied to a specific project, the expected costs in the business are analyzed in the beginning phase of the planning period. The project manager then approves the predicted expenses in purchasing the materials required for the project.

The costs and expenses are recorded and monitored during the project execution period to ensure that the cost is in line with the actual cost management plan. Once the project is complete, the actual costs are compared with the predicted costs, which will help in predicting future expenses.

Some of the advantages of cost management include:

• The ability to predict a project's future expenses and costs
• The maintenance of a central record of all predicted expenses
• The ability to ensure that costs are approved before purchases are made
• The ability to control a project's expenses

Cost management is simply the process of planning a company’s budget and controlling it as well as spending the money according to the budget. It calls for anticipating expenses to control production costs and offer products that are affordable to consumers. 

Startup companies apply the process at every stage of their business operation. For example, cost management implies making accurate projections during planning. It also includes closely tracking spending during the implementation period. Additionally, cost management entails making sure the actual cost of the project matches the budgeted cost. This helps startups predict expenditures and prepare the right budgets in the future.

Other interesting terms…

• What is a Business Model?
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Read More about “Cost Management”

The future of every startup relies on the success of its projects. Cost management is a way to ensure that by empowering organizations to maximize resources. The application of modern cost management models enables managers to increase productivity, workforce competitiveness, and revenue.

Cost management encompasses several processes and tools, such as life cycle costing and value engineering, to estimate the costs and returns of a project. Life cycle costing looks at the stages each project or asset goes through and the expenses involved. Meanwhile, value engineering is concerned with searching for ways to derive the most value from equipment and resources used for initiatives.

Cost management software are available for project managers to ensure the success of their initiatives. Oracle, Hubstaff, and Microsoft are among the software vendors that offer their own cost management technologies. While such platforms facilitate the cost management process, they’re not a prerequisite.

How is cost management achieved?

Steps Involved in Cost Management

Cost management is made possible by the following activities:  

• Resource planning: This lies at the heart of every cost management initiative. It refers to managing the human and nonhuman resources needed to make a project a reality, such as workforce skills, natural materials, and utilities.

• Cost estimation: The goal of cost estimation is to prevent budget overruns and provide an accurate calculation of all assigned costs to each project element. Estimates need to be validated by company leaders, clients, and suppliers.

• Cost budgeting: This mainly involves setting an approved budget for each task, as determined by the resource plan and estimation. It aims to identify a cost baseline to keep costs on track.

• Cost control: This refers to the practice of adjusting costs based on the predetermined budget. Its overall end goal is to increase profitability.

Now that you have a better idea of how cost management works, does it involve any other process?

Other Functions Related to Cost Management

Cost management also involves some pre- and postmortem activities for each project launch. These activities are:

• Progress reporting: Keeping stakeholders in the loop is part and parcel of cost management. Progress reports allow leaders to determine whether costs and time lines are on the right track or need some adjustments.

• Earned value analysis (EVA): This is a project management procedure where managers evaluate project performance by comparing whether or not the anticipated output (planned value) and current output (earned value) match. Similar to other cost management processes, it seeks to understand if the team is under- or overbudget and hitting or missing targets. EVA also enables forecasting future project-related costs.

Apart from related processes, knowing the various techniques to manage costs is also helpful.

Cost Management Techniques

Take a look at three of the many cost management techniques your business can adopt below.

• Invest in technology: This tactic can help streamline business processes. Using the latest technology improves product quality, lessens production time by increasing productivity, and keeps the employee count within a desirable range.

• Consider outsourcing: Outsourcing can lower costs incurred on one-time projects. So long as the third party can perform the desired tasks and stay within the agreed-upon budget, this method costs less than hiring new employees to tackle the project or training regulars to do the job.

• Manage time efficiently: Any business owner knows that time is money. Then again, not all employees hold the same value. That’s why it’s important to pass down the relevance of time management throughout the company to achieve desired results.

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Now that you know more about cost management, are you ready to take your business to the next level?

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