Cost management is the process of planning and controlling the budget of a business. Having a good cost management system in place makes it easier for an organization to estimate and allocate its budget.
Cost management is a form of management accounting that helps a business reduce the chance of going over budget with more accurate forecasts of impending expenditures. Many businesses use cost management tactics for specific projects and for the overall business.
When applied to a project, expected costs are calculated while the project is being planned and are approved beforehand. All project expenses are recorded and monitored to ensure they align to the cost management plan. After the project is finished, the actual total costs are compared to the predicted costs. This analysis enhances future cost management predictions and cost budgeting.
While cost management is a general term relating to project cost management in any industry, it also often refers to estimating and managing cloud services costs to reduce cloud waste.
Cost management is an integral part of project planning and management. Cost management strategies are developed alongside the project plan.
The following are the four main steps to cost management.
The setup phase determines what's included in the cost management plan. It identifies who the stakeholders in the plan are, the tools used to manage costs and the data structure needed to track costs.
This planning phase identifies the resources needed to complete a project. These could be physical materials, information assets, staff and cloud computing resources. Resource planning determines resource allocation, including how much of a resource is needed, for how long and how it will be allocated.
In this stage, project teams develop a project budget. Budgeted cost estimates get more specific as the project scope is refined. A picture of the full project costs emerges as resources are allocated.
Project managers compare the current project to earlier ones to gain insight. They can use top-down and bottom-up estimation methods. In the top-down approach, upper management in an organization determines the project duration, the tasks and project activities involved and the estimated costs for each of them. In a bottom-up approach, each team estimates the duration and allocated budget of their individual tasks. Management uses that information to determine the project's duration and estimated budget.
This phase involves monitoring and controlling costs as the project progresses, using data from different project teams. Managers track how costs differ from the estimated budget and take action to accommodate cost overruns, reduce deviations from the budget and cap the budget when necessary.
Effective cost management processes require accurate cost reporting. This involves access to real-time cost data and insight using data visualization. Variances from budgeted costs must be measured, and corrective measures taken.
The benefits of cost management include the following:
Common challenges of cost management include the following:
While cost management software is useful, it's not imperative for executing a cost management plan. These tools commonly include the following functions:
Several business intelligence programs offer cost management software to help organizations monitor costs and increase profitability. Some of these include Google's Looker, Microsoft Power BI and Oracle Analytics Cloud.
Cloud vendors also offer proprietary cost management tools to help users track and optimize costs. Two such tools are the following:
Vendors may refer to cost management software applications as cost accounting, spend management or cost transparency products. Cloud cost management tools may also be referred to as FinOps.
Cost management is particularly important in cloud management, where bills can skyrocket because of unaccounted-for service fees. Learn eight ways to cut cloud costs and avoid unexpected bills.
04 Jan 2023