THEY say a small leak will sink a great ship. But this is not about leaks, nor anything related to sea vessels. It speaks about spending that, when not properly recorded and accounted for, can put a dent on savings over time. Personal money management does not require a sophisticated process and usually, sticking to an expenses plan and setting the right financial goals do the trick. However, for cost management intended for businesses, a different ball game is needed.
When the pandemic struck almost two years back, financial managers and personnel of businesses bore the brunt of its effects. Suddenly, finance departments were put on the spot for their plans on managing corporate funds at the height of a changing business and economic landscape. What ensued was a corporate turmoil. No one had foreseen the onset of the Covid-19 pandemic, more so its financial impact. Businesses saw significant declines in revenue and, at the same time, they saw their debts piling up. According to the US Census Bureau Small Business Pulse Survey — a study with small businesses as respondents — 83.5 percent of companies in the food services industry admitted having recorded adverse effects at the start of the pandemic. Of those surveyed, 31 percent predicted that they would likely see business return to normal only after six months from the time the pandemic hit. The Philippine Statistics Authority, in a report released in March this year, stated that a 12.4-percent decline was recorded in the gross revenue index in 2020, with transportation, storage and communication, and real estate, among other sectors, plotting the steepest drop. Top companies in the country were not the only ones directly affected by the pandemic. A report released by the Asian Development Bank provided that nearly three-fourths, or 70 percent of small businesses surveyed, closed shop temporarily. More than half of business-respondents claimed to have seen revenues decline by over 30 percent.
Considering the adverse impact of the pandemic to the financials of businesses, particularly to micro, small and medium enterprises, an effective cost management strategy is needed to help them thrive.
What is cost management? In a nutshell, cost management covers estimating costs and effectively allocating them to control, to a large extent, expenses. This process helps businesses map out their current funds and predict future costs so that they can avoid going over their allotted budget. One of the benefits of having an effective cost management plan is that it helps businesses track their finances and at the same time, allows them to have a good benchmark of future project costs and proper budget allocation in the succeeding fiscal year.
With cost management in place, businesses can avoid overspending and ultimately, be able to come up with reports on budget and costs that can aid in future planning. Risk avoidance is also one benefit that companies can reap once they beef up their cost strategies.
Cost management within corporate governance. Cost management should not be seen as a separate program, but one integrated within the corporate governance structure. This corporate structure governs the internal management mechanisms and fixes relations among a company's board, its shareholders and other stakeholders. It is under this corporate system that we can classify cost management strategy as a subsystem that affects overall business operations.
Usually, a company's project managers lead cost management planning. They are tasked to do cost estimates, monitor spending and forecast risks based on cost reports. The role then of project managers and finance department teams are inherently essential in this regard, particularly during the pandemic.
The solution might seem simple — cut back on costs to adapt. But this is easier said than done. While simply reducing costs would have worked well during any other corporate crisis before, the new realities brought by the pandemic are enough to drive businesses to look for a different game plan. The current "new normal" requires a strategic scheme and reducing costs is now not deemed merely a solution, but a goal. The pandemic has indeed ushered a need to tinker and reevaluate existing cost management mechanisms and from there, come up with a robust financial program that can weather its blows.
Engage in resource planning. The initial step is to look at all the available resources of the company, from people to equipment, needed to complete a business undertaking. Resource planning means identifying costs essential to finish each stage of a project, from start to fruition. Anticipating contingency events and allotting an extra budget to cover them will also help businesses manage their expenses.
Invest in the right tools. The whole cost management process entails investing in the right tools that can make resource planning more efficient. For example, businesses will need to prepare a work breakdown structure to simplify resource planning. To achieve this, the company can consider investing in a reliable resource planning software or get a consultant, particularly in coming up with a cost benefit analysis.
Anticipate risks, improve cost estimation. Estimating costs covers the process of forecasting resources needed to complete a particular business project. What makes it a little difficult to undertake are contingencies, or those events or circumstances that we know may occur at some point in the future, but which cannot be predicted. Therefore, to come up with a good cost management strategy, it is equally vital that you consider your company's contingency plan as well. This way, cost estimates will have extra room to cover potential contingency events.
Track your progress. Do not forget to monitor your ongoing cost management strategy, as this can be your guide in considering future action plans. Management reporting can also help businesses get the right financial information that they can use to make informed decisions. Ultimately, the whole cost management scheme is summed up by this principle: plan today, save on costs tomorrow. Identifying potential risks and contingencies, looking at existing resources and monitoring past cost management reports will help you cut back on losses and in the end, prevent small leaks from sinking your ship.
As published in The Manila Times, dated 24 November 2021