Every project requires a certain amount of resources to complete successfully, including capital. Estimating potential project costs helps to avoid over- or underspending on projects and produce better results. Developing a cost management plan may help you estimate how much capital you need to achieve your goals.
What is cost management?
Cost management is the process of estimating project costs to more precisely control how you allocate your money. The term shouldn’t be confused with cost control, which typically has more to do with reducing future costs based on your current financial data.
The basic principles of cost management
To effectively manage your costs, you may want to consider the following cost management principles.
Run a cost management analysis first
You should generally always run a cost management analysis before assigning the tasks involved in your projects. Ideally, you’ll figure out each project's cost and resource requirements well in advance. This way, you can plan your schedule so that all your projects get their resources when they need them.
Monitor project costs
The cost estimating process often happens multiple times over the course of a project as external forces change its scope. This means that your projects will likely require your continued attention. This way, you can determine whether you need more resources to deliver a high-quality product.
Compare actual costs to estimates
Once the project is complete, it’s important to compare your total costs to your previous estimates. Doing so may provide valuable insights into your resource planning and how it can be more effective for future projects.
The role of cost management in business
Good project cost management may help you use less of your most limited resources while still using them efficiently. And really, all your resources will likely have some limit – maybe you’ll run low on materials, or maybe you’ll have employees on vacation. Effective cost management may help you more smartly use your finite resources.
Cost management techniques for small businesses
Below are four valuable techniques you may include in your cost management process to use your resources more effectively.
Help employees use their time more efficiently
Your employees are your most valuable resource when they use their time effectively. Without good time management across your team, you could end up paying more money for less consistent results. Hiring a project manager to watch over daily progress may help keep your team on the right track.
Overhead costs may eat away at financial resources you could otherwise put to more productive use. A great way to lower your costs is to switch partially or fully to an e-commerce or digital services model. E-commerce operations typically don’t involve brick-and-mortar stores’ rent and utility costs, thus lowering your overhead. If you’re already operating from a physical storefront, condensing your utilities to come from as few companies as possible may also help to lower your costs.
Outsource tasks where possible
Keeping a large workforce on payroll may be a bit much to handle in the early stages of your growth. It may be more affordable to outsource less important tasks to specialized companies – you’ll likely still get high-quality results. You may put the money you save back into your company – you could save up to 15 percent as compared to going in-house.
Find cost management software
You may consider using cost management software to view your project’s expenses and profitability at a glance. This typically removes the need for manual data entry, increasing your information’s accuracy. A cost management platform that’s easy to use, with a clearly organized interface, is often your best bet here.
The 4 steps of cost management
There are 4 steps you may want to consider following to help effectively manage project costs.
Step 1: Make a plan and a schedule
First, evaluate the scope of each project and determine the type and amount of resources needed to complete your projects within a reasonable timeframe. Then, use your estimates to figure out the best time to start a project and give your team the resources they need. It’s important to take your resource availability into account alongside any unique project limitations. This way, your team has a better idea of what is required to produce great work.
Step 2. Estimate all your probable future costs
Next, you’ll estimate the overall cost of each resource. Note that estimates are rarely final – you’ll likely have to redo them every time the project’s scope expands or there’s a sudden change within your company. The more recent your estimates, the more likely you are to stay within your project's budget.
Step 3. Create a budget
Here, you’ll create a cost baseline and figure out how much money you’ll need using the estimates from the previous steps. A good budget typically accounts for all possible expenses from the beginning of a project to its end. It also keeps timeframes and resource constraints in mind to help ensure even resource distribution.
Step 4. Stay within your budget
After you set your budget and fund your project, your project manager will typically need to carefully monitor your resources to avoid cost overruns. Keeping your costs within bounds often means watching out for when they deviate from your estimates and taking corrective action when needed.
What are the challenges of cost management?
Below are some cost management challenges that you may want to consider during the process.
Managing changes in scope
Projects can change while your team is working on them, and that means their costs will typically change too. Sudden shifts in the availability of resources could make cost budgeting that much more complex, which may slow down progress.
Potentially unreliable data
Your team will make key decisions with the cost data and estimates you generate during cost management. That means you should consider going over this data with a fine-toothed comb. If you or your team makes choices based on faulty information, it may complicate the project down the line.
Inefficient cost-managing systems
If you haven’t updated from physical spreadsheets to computer-based management, now may be the time to do so. It’s typically easier to add and store your cost data in a cost management program, which makes this information easier to track in real-time. And if you see that your revenue just isn’t covering your costs, there may be efficient ways you are able to get more money too.
Use SmartBiz® for a stable bottom line
If you’re lacking the capital needed to start your more ambitious projects, SmartBiz may be able to help you get it. SmartBiz uses your business’s financial information to help connect you with SBA loans, bank term loans, and custom financing options that can bolster your bottom line. Check to see whether you pre-qualify* today.