What's the ultimate solution to control Cost and save Money in any business? Probably you don't know yet!
Strategic Transformation Leader | ERP, IT & Enterprise Solution Project Manager | Master Business Analyst | Management Consultant | Driving Innovation Through Process Optimization, Culture Development, and Automation Technology | 26 November, 2018 (Monday)View 4073
Every business is about making money. Sometimes you make more money, sometimes less money. Also sometimes you lose money. Losing money continuously lead to business failure.
2 ways to make more money
In any business you can make more money in 2 ways
- Increase selling price
- Reduce cost
In most cases, you cannot do the first one because of your competitors and market situation. If you increase selling price, people might not buy your product or service. Therefore this is not totally under your control.
The second one "Reduce cost" is under your control. You can always save cost and make more money. In order to do that, you will have to follow some guidelines or steps discussed later in this article. Whether you are in manufacturing business, or in service business, the secret of making more money is same.
You need to know where and how much you are spending
In order to save costs in the business, first you need to know where and how much you are spending. Without knowing that, it's impossible to control cost and save money.
Look at all costs, not just the big ones
It can happen that for a particular Sales Order, you purchased material with very low price and still you could not make money from that order. Because the material quality was not good, you had to spend more time in re-processing the material to make that usable; you had to spend extra time in production; there was more bad quality items in the output etc.
Therefore just looking at material cost is not enough. There are a lot of costs involved such as
- Material Cost
- Manpower Cost
- Machines depreciations & Maintenance cost
- Overhead costs
- Logistics, tax, customs, insurance cost
- Space or land cost
- And all other costs depending on your business type
For each order you are handling, you must record each and every cost related to specific orders.
Compare your Actual costs with Planned cost
Comparing is the key to control cost. If you don't compare your actual cost with planned cost, then you will never be able to save cost.
When you compare your costs, only then you know exactly where you went over-budget. While comparing, you must go thorugh each and every cost elements. You may have saved cost in Material Purchasing, but you may have paid penulty due to late shipment.
In short: 4 steps to control cost and save money
After summarizing what explained above, we get 4 steps to control cost and make more money
Step 1: Record the PLANNED/BUDGETED cost
- Breakdown the costing for each order in detail and set the limit how much you will spend for Material, Labor and all other categories
- Record your detail costing for each Sales Order you receive from customer
Step 2: Calculate the ACTUAL cost
- Identify all possible area where you are spending money actually
- Record every cost connecting to the specific Sales Order
- After shipping out the order, calculate the total cost of goods sold for each Sales Order
Step 3: Compare PLANNED/BUDGETED and ACTUAL costs
- Compare the values found from Step 1 and Step 2
- Get to know where it went over budget and under budget
- Identify why it went over budget
Step 4: Control cost and Save money
- Now you know which order made money and which order didn’t
- Now you know why did you spend more money than required
- Now you know where did you spend more
Now you have clear picture about your business. You can take initiatives to control and prevent the loss for the next time.
There are no shortcuts for controlling cost without going through all the above 4 steps.
The ultimate purpose of an ERP solution is to help you to achieve the first three steps. If you haven't achieved that through your ERP, then you still have work to do on your ERP project.
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