Is it important to know what it costs to make a widget, or to provide your service? If you have profit at the end of the day, isn’t your revenue greater than your expenses? Of course, the simple answer to that is: yes. But, could it be more? Could you have more cash left at the end of the day? Most people would like to have more if they could. There are a variety of ways to improve your profitability, but one of the best ways is to truly know your costs.
Would you have more money in your pocket if you had a dollar for every time you said you really should update your cost accounting system? What has prevented you from updating it in the past? What would you have been able to do today during this pandemic if you had an accurate cost accounting system? Business leaders can make effective decisions without it, but better data leads to better decisions.
Many systems are allocating costs based on a driver that was relevant for the business 50 years ago, or one that is incorrectly classifying costs. Worse yet, are you allocating costs based solely on best practices or industry averages?
Your cost accounting system needs to be specific to your business and operations. It should not continue to be put on the back burner. Below are some things you can do with a good cost accounting system.
- Know your break-even point
- Understand desirable mix
- Know your variances and react
- Know your profit margin
- Make fast decisions to cut costs
- Make versus buy analysis and decisions
- Know what variable costs you can remove and what fixed costs must be covered
Can you confidently say that you can quickly and accurately answer questions like the above? What if you could? Would your business be in a better spot today during this pandemic if you had the answers?
Having good information to make strong decisions may be the difference between having to lay off employees or not. Having good information can’t prevent those things from happening, but it certainly can facilitate better forecasting to do all you can to prevent it, and to quickly get back to operational. At the very least, you can have confidence you did all you could and made the best decision overall.
We are all in this together and we will all come out the other side stronger than before. To be prepared for whatever comes next, ask yourselves the hard questions: what do you wish you had if something like this ever happens again? Don’t waste the opportunities that can come out of crisis. Be prepared next time.
Recruit help, push hard and do not let another day go by wishing you had good data to make good decisions. Contact a CSH advisor today—we’re here to help.