Cost Management: A Quick Guide to What It Is and Why It’s Important

Effective cost management is a crucial part of project management and organizational development. Your ability to manage, control, reduce, or maintain costs as needed directly impacts the success and profitability of your projects.

In large organizations, you’ll likely have a dedicated finance team responsible for much of the cost management for the business. But some aspects may fall to the HR team, who are well-placed to manage and report on personnel costs for the company. That includes employee costs like salary, benefits, and healthcare, as well as costs related to growing or maintaining the workforce, such as recruitment or promotion-related costs.

So even if someone else will be doing most of the cost management work, it’s still important to understand what it is. Here’s a primer on cost management and how to leverage it for the benefit of your organization.

What is Cost Management?

Cost management is a strategic approach businesses use to plan, control, and reduce their operating costs while maintaining team morale and product quality. It seeks to achieve cost efficiencies without compromising on the organization's core values and way of working.

Cost management strategies are typically implemented across all phases of a business’ operations, from the initial planning to execution. These strategies involve analyzing all expenses, making data-driven decisions to allocate resources effectively, and periodically reviewing these decisions to optimize cost efficiency. 

Cost Management Process in Five Simple Steps

Implementing a successful cost management process involves a series of steps, each contributing to the goal of financial efficiency. Here’s a quick overview of what your cost management process may look like:

1. Cost Planning

This initial stage involves setting financial objectives and agreeing on your budget. Here, businesses decide what costs are necessary, where savings could be made, and what resources are required to achieve their strategic goals.

2. Cost Analysis

Businesses examine their existing costs and the factors contributing to them. This process includes identifying all costs, understanding their origin, and evaluating whether they are essential or can be reduced.

Start by conducting a thorough review of your current expenses. You can break them down into categories: fixed, variable, direct, and indirect costs. For example, HR leaders will likely look at employee salaries and other, less fixed costs like recruiters’ fees and budgets for advertising openings on job boards.

3. Cost Control

Once you have a clear picture of your existing cost structure, you can identify areas where you can become more efficient without compromising product or service quality.

This next step focuses on implementing measures to keep costs within the planned budget. It involves regularly monitoring and controlling cost performance and making necessary adjustments to stay on track. For example, you might have monthly meetings with all heads of departments to look at their progress against their budgets and make changes as needed to keep them on track.

4. Cost Reduction

This involves identifying opportunities to decrease expenses without affecting product or service quality. Techniques may include process automation, renegotiating contracts, or reducing waste.

Four of the biggest HR-related costs include: high employee fluctuation rates, employee turnover, sick or absent employees, and administrative inefficiencies. So when looking at ways to reduce costs, these could be a great place to start.

5. Cost Reporting and Review

Regular reporting can help you understand how effective your cost management strategies have been. And reviews and feedback sessions can help ensure your cost management practices remain effective and aligned with your business objectives over time. 

Setting clear, measurable goals and using analytics to monitor progress will help keep your cost management strategy on track. Remember that it’s an ongoing process that needs continuous refinement and adjustment.Conducting regular reviews and reports means you can make adjustments and improvements over time as you spot things that aren’t working, or could be working better.

Why Cost Management is So Important

Cost management is an essential practice for any organization aiming to maintain its financial health and operational effectiveness. It’s an important part of strategic planning and decision-making. Here are some of the main benefits:

Reduces Risk of Overspending to Boost Profitability

Cost management helps prevent overspending by setting a clear budget and tracking all costs associated with business activities. It can help you spot any overruns early, giving you more time to make changes to reduce the impact of overspending.

Cost management is a proactive approach — it ensures you’re using your financial resources effectively, and helps reduce the risk of costly errors or miscalculations. Plus, by controlling and reducing overspending, companies can improve their profit margins. This allows them to invest more in areas that fuel growth and innovation, which can become a real competitive advantage.

Improves Project Visibility and Decision Making

Through systematic cost management, companies gain a clear picture of their project's financial health. It provides valuable data that helps leaders make informed business decisions.

By understanding where and how resources are spent, business leaders can allocate resources more effectively and strategically. For example, they’ll be able to spot potential issues, adjust plans as necessary, and use their financial data to guide their decision-making. This increased transparency can contribute to improved performance, accountability, and overall project success.

Supports Company’s Long-Term Financial Health

A consistent focus on cost management supports the long-term financial health of a company. Effective cost management helps organizations create a buffer against economic downturns or unforeseen expenses. It often involves identifying inefficiencies and eliminating waste which can result in more streamlined operations and improving cost efficiency and productivity — all of which are important for your company’s long-term financial health.

Cost management promotes financial stability by getting business leaders laser-focused on preserving cash flow, increasing profitability, and ensuring funds are available for future investment and growth. This is critical to maintaining trust among stakeholders and achieving the company's strategic objectives.

Manage Costs With Employee Wellbeing

When you’re trying to manage or reduce costs, it can be tempting to cut lots of things that don’t seem like they’re “business critical.” But it’s vital to consider the return on investment of your spending, not just the initial cost. 

For example, employee turnover and staff sickness are two of the biggest drivers of HR costs. Companies who invest in employee wellbeing programs strategies are almost 11 times more likely to see reduced rates of absenteeism in their teams, and three times more likely to keep employees engaged. What’s more, 90% of companies with a workplace wellness program see a positive return on investment from those programs, thanks in part to lower healthcare costs, sick day utilization, and talent management costs.

Implementing an employee wellbeing program can be a great way to manage your costs while helping employees thrive! Speak with a Wellbeing Specialist to learn more.

References

• Direct Costs vs Indirect Costs (October 2021). GoCardless. Retrieved July 7, 2023 from https://gocardless.com/guides/posts/direct-costs-vs-indirect-costs/
• Gartner (n.d.) Finance Glossary: Cost Structure. Retrieved July 7, 2023 from https://www.gartner.com/en/finance/glossary/cost-structure
• Personio (n.d.) The Four Major Drivers Of HR Department Costs. Personio. Retrieved July 4, 2023, from https://www.personio.com/hr-lexicon/major-drivers-of-hr-costs/
• The Healthy Organization: The Definitive Guide to Wellbeing. (2021.) The Josh Bersin Company. Retrieved July 4, 2023 from https://joshbersin.com/wp-content/uploads/2021/10/HW-21_10-DefGuide-The-Healthy-Organization-Defintive-Guide-.pdf