In the current challenging macroeconomic environment with high inflation, how businesses can remain competitive and successful in the market has become a key issue. In this article, we aim to provide guidance to the domestic SME sector on how they can increase their profitability by establishing and maintaining appropriate cost accounting.
3-minute read
Every company seeks to optimise its ever-increasing costs as much as possible while maximising revenues. However, making the right management decisions is key, and these decisions should not be made on an ad-hoc basis, but on the basis of rational, reliable information.
This information can always be based on preliminary calculations and analyses.
This is no different in the case of cost efficiency and revenue maximisation.
Although costing is not an obligation for all companies, it is an issue that affects everyone in some way.
Many would think that costing is only relevant for a production company, but this is not the case.
Think about it: for any business, one of the pillars of effective operation is proper pricing and the resulting selling price, which must not only cover costs but also generate a profit for the business.
In order to price properly, it is important to be aware of all the costs involved.
Here, of course, we need to take into account not only the cost of materials, but also all the other indirect costs that are involved in producing our product/service. We can think here of other expenses such as labour, operating costs, overheads, rent, or other administrative costs, but also management costs.
These also need to be allocated in order to determine the selling price as accurately as possible.
It is therefore clear that, if you are not producing but providing a service, it is at least as important to assess your costs properly and price accordingly.
As a large part of the production costs depend on external factors, such as procurement, it is very important to be able to monitor them continuously. If we are not aware of all the costs we incur, we will not know how much the selling price actually covers. It is therefore easy for our revenue not to cover our costs and for the production of the product or service to be loss-making, which in the long run could jeopardise the profitability of the business.
However, there are other advantages to cost accounting.
Sometimes, it is only after a customer agreement has been concluded that we are faced with the fact that our costs will be much higher than what our customer will pay us.
In this case, we are forced to make a decision: either to withdraw or to try to re-evaluate our business processes. However, re-evaluation can only be successful if we have a clear understanding of our costs.
Progress is also a factor that should not be neglected.
Our business can only be successful in the long term if we are able to keep abreast of ever-changing market trends and bring new innovations to market.
However, before offering a new product/service, it is essential to do some preliminary calculations related to the production process: what resources are needed, how much they will cost, what we can gain from the innovation.
The new product/service development process should carefully incorporate ongoing cost calculations to ensure that the end result is potentially successful.
The precondition for proper costing is accurate self-cost calculation.
From time to time we may be faced with a situation where a customer wishes to purchase a large volume of products/services and requires specific pricing. In order to know what the price is that our business can still provide without risk, it is crucial to accurately determine the cost price.
Last but not least, costing can also help us in customer management.
Costs often vary depending on the individual customer and market entry channel.
Being aware of how costs vary across these segments will have an impact on both our customer acquisition decisions and the customer acquisition process. By knowing the costs, the company is better able to map out which types of customers to focus on.
As you can see, proper costing is a very important part of running your business effectively, efficiently and competitively.
However, it is not always the same how the calculation itself is designed, which model is used to determine the costs. There are so many companies, so many processes and so many different factors.
In order to develop the right costing model for your business, it is worth seeking the help of an external consultant.
The consultant can help you to identify the parameters that should be taken into account when developing the costing system and support you in setting up the costing system as required by the Accounting Act.
Written by: Pető-Szűcs Anett, accounting expert of ICT Europa
