What Is Cost Management? (With Importance And Steps)

By Indeed Editorial Team

Published 6 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Cost management is a process that involves creating estimations, preparing budgets and controlling costs. The objective of this type of management is to increase an organisation's productivity and enhance profitability. Learning about cost management can help you better understand how a company identifies and categorises costs according to project requirements and why it has an important role in planning, controlling and decision-making. In this article, we answer the question to ‘What is cost management', discuss its importance, outline some of the steps involved in the process and share a few key differences between cost management and cost control.

What Is Cost Management?

The answer to the question ‘What is cost management?' is that it is a process a company can use to determine, gather, evaluate and classify crucial information for its cost ascertainment. This process offers companies valuable information about costs and revenues, along with nonfinancial information about productivity, quality and other success metrics for businesses. You can use this data to gain a competitive advantage. A typical cost management process starts with the initial phase of project planning and covers the entire project cycle. This allows you to forecast expenses and complete a project while staying on budget.

Cost management is a business tool that provides you with essential information about resources and infrastructures that you can use to assess the accomplishments of a business' objectives. With cost management, companies can determine if their business activities align with their project execution strategies. The success of this management largely depends on a manager that possesses an in-depth knowledge of a company's varied processes, customers, products and services. When you fully understand these components, you are better able to plan strategically and improve operational quality.

Related: What Is Cost Of Production? (With Factors That Affect It)

Importance Of Cost Management

Here is why cost management is important for an organisation to set baselines for project costs:

Developing a business

Companies that successfully manage their operational costs tend to complete projects efficiently and grow their business over time. This means that they accomplish tasks associated with projects in the budget. By using cost management, you can easily anticipate expenses and prioritise financial goals.

Related: What Is Cost Accounting? (Definition And Objectives)

Making decisions

Part of cost management is conducting a methodical analysis of facts and figures. This assessment provides an evaluation of a project's feasibility and profitability. With this important data, it is easier to make accurate, data-driven business decisions. Using cost management during the planning process can reduce the likelihood of risks associated with a project.

Reducing expenditures

Cost management is a great tool that many companies utilise to lower their overall business expenses. The process of reducing expenses involves limiting different costs, such as marketing or supply chain expenditures. The financial information that a cost management process produces helps identify and eliminate funds you may have allocated to redundant operations or avoidable debts.

Related: What Is A Cost Accountant? (With Duties, Salary And Skills)

Keeping records

Efficient record-keeping is another benefit of cost management. It helps businesses perform effective financial accounting planning and develop budgets with an expenditure limit. You can get an overview of a business' expenditures by assessing business or project costs. This helps financial planners and managers create accurate budgets.

Managing debt

One of the major objectives of employing cost management measures is to reduce the overall costs of a business. During the process, you may decide to restrict funds that different employee levels have access to and use. This allows you to make more cash available for managing debt or other initiatives. A business that has a low debt ratio demonstrates its ability to overcome various financial risks.

Increasing budgets

If a company has more money at its disposal because of efficient cost management, then it can increase its budget in certain areas. Increasing the budget for marketing and advertising can help reach more potential customers and lead to greater profitability. You could also decide to increase the budget of teams that are performing well and contributing to business growth.

Related: What Is Project Planning? (How To Create A Project Plan)

Steps Involved In The Cost Management Of A Project

Here are some steps that are generally involved in a project's cost management process:

1. Plan cost management

The first step requires outlining the essential resources for completing the project's activities. You can start by collecting information about past projects or projects that are similar to the one you intend to complete. This way, you can determine the necessary resources, including labour and time, that the team might require for the successful completion of different tasks.

2. Estimate and budget costs

This step involves calculating the costs associated with any essential resources for every stage of the project, from beginning to end. Cost estimates allow a business to summarise a project's expenditures. Budgets help you allocate project expenses and formulate a cost baseline.

Related: What Is Zero-Based Budgeting? (Advantages And How To Create)

3. Control costs

The last step in the cost management process is cost control, which focuses on evaluating where and how actual project costs vary from estimated costs. Cost inconsistencies are not the same as a budgeted cost. An understanding of committed costs, actual costs, forecasted costs, approved costs and original costs is essential for managers and financial planners overseeing budget controls. If unforeseen risks arise that can affect the approved budgets for a project, it is essential that you review the intensity of their impact and take corrective measures as necessary.

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Differences Between Cost Management And Cost Control

Below are some differences between cost management and cost control:

Who uses cost management and cost control?

Different employees utilise cost management and cost control. While team members working on a project may employ cost management, accountants or financial specialists use cost control for other business operations. Financial planners employ cost control to evaluate a company's present financial standing. An entire team may be responsible for managing costs and remaining aware of a project's financial position.

Why businesses use cost management and cost control?

A business estimates and compares budgets using cost management. Team members may not participate in a cost control process. Businesses use cost management to monitor financial activities throughout a project, while accountants utilise cost control to temporarily assess finances during a business activity. Cost management is a continuous process for team members that you can use to ensure a project's financial security.

Related: A Step-By-Step Guide On How To Manage Projects (With Tips)

What happens in cost management and cost control processes?

Cost management offers an estimation of a project's financial activities, while cost control aims to use adjustments and estimations to positively change those activities. Cost control is not a continuous process and usually occurs during specific periods in a project. A department in a company can use cost management for its particular activities to achieve its cost maintenance goals. While cost management focuses on projecting cost estimates, cost control aims to analyse past financial information to formulate an action plan for ongoing projects.

When does a business use cost management and cost control processes?

The beginning and end of cost control and cost management processes depend on different financial operations. A business can use cost control when there is a financial discrepancy or if it suspects a capital loss, while a team could perform cost management processes to control all the financial requirements of a project. When a business successfully stabilises its financial activities, it could decide that it no longer requires the use of cost-control measures.

Related: What Is Implicit Cost And Explicit Cost? (With Examples)

Tips For Successful Cost Management

Here are some tips you can follow when performing cost management measures:

  • Enhance budgeting: You can become successful at cost management by efficiently monitoring the finances of the organisation and its projects. This involves the ability to identify any expenditures that could make a project exceed its budget.

  • Automate tasks: There are various industry-specific automation tools that you can use to improve the organisation's operational efficiency and cost management. Robust programs automate routine administrative tasks and allow you and your team to focus on other tasks while boosting overall productivity.

  • Stay flexible: Since cost management is a continuous process during a project, staying adaptable helps project managers adapt as a project's requirements change. Effective cost management can often help you adjust to dynamic cost estimations to produce positive results.

  • Constantly improve: The more you learn about your projects, the easier it may be for you to understand the nuances of the costs associated with operations. Through research and gathering data, you can make decisions that allow you to budget efficiently and complete projects successfully.


Related:

  • How To Calculate Variable Cost in 3 Steps (With Examples)

  • What Is Aggregate Cost? Definition And Related Terms

  • How To Conduct Project Cost Estimation: A Complete Guide

  • What Is The Cost Of Equity? (With Formulas And Examples)


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