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.
Many CFOs know the importance of getting a better handle on their costs—updating their cost accounting system is on the to-do list, but it never gets to the top.
Are you in this boat? If so, what has prevented you from updating your cost accounting system in the past? Would you have been better prepared for the Covid-19 pandemic if you had an accurate cost accounting system in place?
Many cost accounting 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, others are 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 and be better prepared to face future disruptions if you had the answers?
Having good information can’t prevent bad things, such as a global pandemic, from happening, but it certainly can facilitate better forecasting and decision making, helping to minimize the impact on your organization. At the very least, you can have confidence knowing you did all you could and made the best decisions overall.
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.
