According to research from McKinsey, 80% of businesses can't maintain sustainable profit if there is no management strategy cost-effective. Spending unreasonable lack of data cost analysis business or just focus cut without optimization can cause the business to fall into the trap of reduced performance.
So how do business not only control costs but also use it as a tool to maximize profit? The answer lies in the cost analysis of intensive combined with AI technology, business help, trend forecasting, detection, waste and financial decisions smarter.
This article Lac Viet Computing will provide a comprehensive view of the cost analysis, from traditional methods to the application of modern technology to help businesses optimize financial resources in the most efficient way.
1. Cost analysis what is a business?
1.1 the Concept of cost of business
Cost of business includes all amounts that a business must spend to maintain operations, manufacturing and supply services. Cost analysis business is the process of assessment, classification, control expenses in order to optimize financial performance.
The cost analysis not only helps businesses control the budget, but also plays an important role in financial strategies long term. A business can have a high turnover, but still in financial trouble if not managed cost effectively.
The main benefits of cost analysis include:
- Specify the account details are not needed to optimize profit
- Support financial decisions based on real data
- Help business valuation products/services more accurately
- Increasing competitiveness through cost control efficiency
For example: A manufacturing company has an annual turnover of 500 billion, but due to production costs, operating too high, the profit margin is narrowed down to only 5%. If not, analyze, optimize costs, businesses can fall into a state of reduced profits or even losses.
1.2 distinguish costs and cash flow: properly Understood to avoid financial mistakes
Many businesses often confuse cost and cash flow, leading to mistakes in financial management.
- Cost: Is all the business account must be spent to operate, including fixed costs – variable costs. Expenses are recognized in the reporting business results (P&L Statement).
- Cash flow (Cash Flow): The cash flows into/out of the business, reflecting the possibility of actual payment. Cash flow appear in the cash flow statement (Cash Flow Statement).
Common mistakes: A business can be profitable on the books but still lack the cash to pay the expense of the customer debt or cash flow management is poor. So, cost analysis not only focuses on spending, but also to consider the cash flow to ensure that the business does not meet the liquidity risk.
2. Classification of the cost of business
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2.1 fixed Costs (Fixed Costs)
Fixed costs are expenses not change according to the level of production or sales. This is the cost a business must pay regardless of business activities take place and how.
Examples of fixed costs:
- Rent offices, factories
- Staff salaries fixed
- Cost of property maintenance, machinery
- Depreciation of fixed assets
- The cost of insurance, cost management
Fixed costs are often difficult to cut in the short term, but if business can be optimized (for example: negotiate price, rental office, optimize hr), can help to improve the profit margin.
2.2 variable Costs (Variable Costs)
Variable costs change according to the level of production and sales. When businesses produce more, this cost will increase, or vice versa.
Examples of variable costs:
- Raw materials
- Production costs direct (electricity, water, labor, production)
- The cost of shipping, logistics
- The cost of advertising, marketing by revenue
Manage variable costs effectively help business control good profit margin. For example, a business e-commerce can optimize shipping cost by signing a contract with a provider of logistics services instead of charging according to each order individually.
2.3 direct Costs vs. indirect costs
- Direct costs (Direct Costs): Are the costs directly related to the production of products or provision of services such as raw materials, wage workers produce.
- Indirect costs (Indirect Costs): Is the cost not directly related to production but still necessary to maintain business operations, such as administrative costs, the cost of training employees.
For example: In a manufacturing company, cost of raw materials as direct costs, also the cost of staff salaries accounting as indirect costs.
2.4 opportunity Cost and impact on strategy, corporate finance
The opportunity cost (Opportunity Cost) is the value of the opportunity lost when businesses choose a plan instead of another embodiment.
For example:
- A business has 50 billion and can invest in the expansion of production or invest in AI technology. If you choose to expand production, the opportunity cost is the benefit from the application WHO that business can have reach.
- If a company uses cash to pay dividends instead of investing in research, new product, opportunity cost is the ability to growth in revenue from that product.
The consideration of opportunity costs help businesses make financial decisions more optimal, especially in the stage of expansion or restructuring.
3. The method of cost analysis business
Cost analysis business is one of the important tool to help businesses control the budget, the optimal profit, given the financial decisions correct. Below are the methods of cost analysis popular, from traditional to modern, help your business have the overall look in-depth about the cost structure.
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Cost analysis according to traditional methods
The method of cost analysis traditionally focused on the calculation of the total cost based on the expenditure fixed – variable. This is a platform that helps businesses understand the cost structure before applying the model analysis enhancement.
3.1 Method of cost analysis whole (Full Costing)
Cost method the whole, or also called the method of allocation of costs, fixed and variable, to help businesses determine the total cost of producing a product or service.
Distance calculator:
Total production costs = fixed Costs + variable Costs
Advantages:
- To help businesses determine the price of accuracy.
- Provide sufficient data to make financial decisions long term.
Cons:
- Not accurately reflect the impact of variable costs in profit.
- May increase the price of the product if fixed costs are too high.
For example, A manufacturing business are the cost of raw materials 100 million vnd/month (variable costs) and the cost of rent, workshops, staff salaries 200 million vnd/month (fixed costs). If the business is production of 1,000 products/month, then the total cost of each product is (100 million + 200 million) / 1.000 = 300,000/product.
3.2 Method of analysis variable costs (Variable Costing)
This method only the costs directly related to production, excluding fixed costs.
Distance calculator:
Total production cost = variable Cost unit × Number of products
Advantages:
- Accurately reflect the cost varies with the volume of production.
- Business support break-even point analysis, and pricing strategy.
Cons:
- Can't is the whole costs the business incurs.
- Misleading, if not consider fixed costs.
For example: A business are the cost of raw materials is 100,000 vnd/product, cost of production is 50,000/product. If production of 1,000 products, the total variable cost will be (100.000 + 50.000) × 1.000 = 150 million.
3.3 analysis of the breakeven point (Break-even Analysis)
Break-even analysis help businesses determine the minimum sales needed to achieve to not be the hole.
Formula:
The break-even point = Total fixed costs / (selling Price – variable Costs per unit)
Meaning:
- Help the business know the number of products or revenue needed to achieve to be profitable.
- Support decisions about strategy, selling prices, costs and production.
For example, If a business has a fixed cost 500 million/year, the selling price per product is 200,000 and variable costs on each product is 100,000, then:
Point = 500 million / (200,000 and 100,000) = 5,000 products.
This means that businesses need to sell at least 5,000 products per month to not be the hole.
Cost analysis according to modern models
The modern method of helping businesses can look more details about cost, particularly when a business operates in the environment of complex business with many influencing factors.
3.4 Method of analysis of expenses by activity (Activity-Based Costing – ABC)
The ABC model helps to allocate the cost based on the specific activity instead of just using the traditional method.
How it works:
- Identify the main activities in the enterprise.
- Cost allocation based on the level of resources used by each activity.
Advantages:
- To help businesses understand the costs of each activity.
- Increase the accuracy in calculating the price of products/services.
For example, If a business has 3 products, but a product costs check out more quality, the ABC model will help determine the right cost for each product instead of divided equally.
3.5 Method of analysis cost target (Target Costing)
This method helps the business determine the maximum cost may be acceptable to produce a product based on the selling price expectations.
Formula:
Target cost = selling Price expectations – desired profit
For example, If the market only accept selling price 500,000/products and businesses that want to profit by 20%, then the cost goal should be 500.000 – (500.000 × 20%) = 400.000 /products.
3.6 Method of analysis, the cost according to the product life cycle (Life Cycle Costing)
This method helps enterprises calculate the total cost from the product development to when to stop trading.
The main stages include:
- Research and development
- Production distribution
- Sales marketing
- After sales support
For example, A business technology can accept the hole in the stage of research and development to optimize costs in the period the sales and after sales support.
4. The financial indicators in the analysis of cost of business
Rate of cost on the revenue (Cost-to-Revenue Ratio – CRR)
Formula:
CRR = (Total cost / Total revenue) × 100%
CRR as low as business as profitable good.
Indicator gross profit – net profit
- Gross profit = revenue – cost of goods sold
- Net profit = revenue – Total cost
If gross profit, but net profit is low, businesses need to consider operating costs.
Index of ROA, ROE and the impact of the cost to financial performance
- ROA (Return on Assets): evaluating the use of the property.
- ROE (Return on Equity): evaluate the return on equity.
If the cost is too high, the ROA/ROE are reduced, affecting the ability to attract investors.
5. Common mistakes in cost analysis and ways to overcome
Cost analysis is an important part in financial management business. However, many businesses suffer from these common mistakes made controlling costs, no optimal performance. Here are three common mistakes and how to fix it to ensure business strategy, financial sustainability.
5.1. Just focus on cost-cutting that ignores optimal performance
Why reduce excessive costs can reduce business performance
One of the biggest mistakes of business when cost analysis is focused only on the cut without assessing the impact on business performance.
The cost cuts can help your business save on the budget in the short term, but if there is no reasonable strategy, it can lead to:
- Deterioration in the quality of products/services, make customers leave.
- Reduce the motivation of staff due to cuts in personnel or reduce the remuneration.
- Reduced ability to expand and innovate, do business, loss of competitive advantage in the market.
How to fix: optimized instead of just cutting costs
Instead of just focusing on reducing costs, businesses should apply the approach to optimize the cost, that is:
- Focus on increasing operational efficiency instead of cutting personnel. For example, Use automated technology instead of reducing the number of employees.
- Optimal cost on each unit of product instead of cutting quality. For example: Purchase of raw materials with wholesale price, big order to reduce the price instead of choosing poor-quality raw materials.
- Investing in technology to reduce costs long-term. For example: Use the software cost analysis to control spend more effectively.
5.2. No cost analysis according to each business activity
Risks when not understood each account expense impact as to how revenue and profit
Many businesses consider only the overall costs without detailed analysis itemized costs according to each department or business activity specific. This leads to:
- Do not know the activity that is wasteful costs.
- Can't identify where the costs need to cut that does not affect performance.
- Product pricing mistake by not properly allocate costs for each product line.
Businesses can use the analysis of expenses by activity (Activity-Based Costing – ABC) to determine the actual cost of each activity and the optimal budget:
- Identify each of the processes in the enterprise: For example, production processes, shipping, marketing, sales.
- Assign costs to each activity: allocate correct shipping costs for each product line, instead of pooled into the overall cost.
- Performance analysis each activity: Determine which activities bring the highest value and the operation does need optimization.
5.3. Do not use technology to optimize cost management
Many businesses still manage costs by method or use Excel to keep track of the budget. However, this can lead to:
- The data are not exact, the lack of updates makes business decisions based on data obsolete.
- Difficult to detect trends in the cost increase unusual, doing business could not adjust the budget.
- Take a lot of time in the synthesis of data, reduce the working performance of the finance department.
How to fix: App technology to analyze the optimal cost
Businesses can take advantage of the tools of financial analysis to automate the process of expense management:
- Use accounting software, financial analysis as AccNet, Fast Accounting, QuickBooks to track expenses in real time.
- Application ANYONE in cost analysis to forecast future costs and to detect abnormalities in the cash flow.
- Use dashboard finance with tools such as Power BI, Tableau for visual display cost data to help managers make decisions quickly.
6. Finance AI Agent of Lac – support tool business analysis cost-effective
Finance AI Agent of Lac Viet is an advanced solution to help businesses automate the process of monitoring, analyzing, optimizing costs, help improve financial performance and make a decision more quickly.
6.1. Finance AI Agent to help businesses monitor optimal cost like?
Finance AI Agent provides system track expenses in real time to help businesses have a comprehensive view of every item of expenditure in each stage of operation. The system automatically collects data from sources such as:
- Accounting software finance management (as AccNet, Fast Accounting).
- System ERP (Enterprise Resource Planning).
- Reported cash flow from the accounting department of finance.
After collecting data, AI will analyze spending trends based on historical transactions and take out the intuitive reporting to help businesses answer the important questions such as:
- The account details are abnormal increase?
- Any costs tend to exceed the budget?
- Parts or activity that is costs the most?
Besides keeping track of the usual cost, Finance AI Agent also has the ability to detect abnormalities in the cost and risk warning.
The main features include:
- Discovered spend no reasonable: If a department spending exceeds normal levels, or there are unusual transactions, the system will immediately send a warning to the leader board.
- Analysis of hidden costs: AI can determine what payments are not effective or does not bring business value.
- Performance evaluation spending: Comparing the cost of the business with the standards in the industry to determine the level of efficiency.
6.2. Application AI to forecast costs and optimize the budget
One of the important benefits of Finance AI Agent is the ability to forecast future costs based on historical data.
The AI system uses the model data analysis to predict trend costs in areas such as:
- The cost of raw materials
- Personnel costs
- Operating costs (electricity, water, equipment maintenance)
- Marketing costs advertising
Forecast costs to help business owners adjust your budget, avoid shortages or financial waste.
In addition to the cost forecast, Finance AI Agent also has the ability to bring out the proposal to adjust the budget based on actual data.
- Suggestions to cut costs, ineffective: WHO will analyze each spending category, proposed the account can be cut without affecting business operations.
- Optimize expense ratio on earnings: a comparison of current expenditure with revenue proposed optimal way to increase profits.
- The strategy of long-term financing to Help businesses determine the necessary investments and limit unnecessary spending.
Cost management business doesn't just stop at the cut, which is also a strategic long-term financing to help businesses enhance performance, maintain sustainable growth. By applying the method cost analysis modern use data to optimize your budget and application technology, AI in financial management, the business can control spending in a smart way, at the same time to make decisions more strategic.
