It goes without saying that profitability is the main objective of anyone who is a business owner, executive director, or “C” suite leader in any company of any size. It is pretty easy to agree with this statement.
If we acknowledge that attaining profitability is a key driver in every business in any sector, then it becomes equally evident that measuring profitability is critical. In fact, measuring profitability is one of the most important ways to measure the success of a business.
Understanding and Measuring Profitability
With this in mind, cost accounting is an effective management tool that enables a company to measure profitability by capturing key information by recording and tracking the data necessary for operating the company most efficiently and profitably. Managing costs to remain profitable is a critical priority across every industry sector, which means relying on data to make smart and educated choices.
Having the right data available is key for every decision maker.
This requires owners to have an understanding of the full costs for producing their products and services, including variable and fixed costs which are those costs that tend to remain the same regardless of seasonality or busy time periods and which do not rise and fall based on the volume of work. All costs need to be part of the analytics that owners draw on when evaluating the company’s success and cost accounting is a tool to use to identify and then reduce or eliminate some of the costs in a business to increase profitability.
Costing data is the basis for strategic decisions, but sometimes road blocks get in the way. The methodology must fit in with the organization’s goals and objectives as well as short term and long term plans for growth and there must be approval from the top.
No accounting process can be successful without strong support from the influencers in the organization. There are best practices that focus on getting involvement across the entire company that can help a business adopt cost accounting as a strategic function. To ensure data relevancy and get the most engagement from the entire team, it is important to:
- Balance efficiency and accuracy
- Implement the most current cost accounting tools and processes
- Be flexible when assigning operating expenses
- Tap into department managers for the cost calculations to ensure the quality of the data and buy-in
- Obtain sign off from the finance department before releasing monthly or quarterly reports
- Emphasize trends and KPIs regarding volume, costs and profitability across the product and service lines that drive the company’s success
- Share the information with top decision makers in a timely fashion
- Assign ownership! Know who is responsible for assembling the data
Conclusion
When incorporating cost accounting systems into a business, the ultimate goal is to provide the leadership team with the resources needed to gather and leverage the most important data for improved, thoughtful decision making. Aligning strategic initiatives across every department in the company requires an understanding and an evaluation of the impact that may result from changes. Asking and answering the question, “what if?” can go a long way to building consensus as well.
Adopting an integrated approach that disseminates accurate, timely, meaningful data across all service and product lines can help a company become a high-performing organization.
Citations
Some sources that were researched for this article include:
Understanding Profitability. www.extension.iastate.edu
Cost Accounting. En.wikipedia.org
Cost Accounting: The Key to Managing profitability in Healthcare. Jay Spence. AxiomEPM.
