As an entrepreneur or small business owner in the first few years, its money that makes your business world go around. Its cash flow, budgeting, funding and being seen by others as a successful business person that is financially sound. As your business grows so does your reputation and a wise, highly successful businessman once said to me that you have one shot at a good reputation.
If you are getting an app/product/service to market then you are managing a project (if you want a heads up on what a project is click here), then cost management is a key driver within your project. The other two key drivers are time management and quality management. One of these three key drivers are the primary driver of your project, ie one of the three is more important than the other two.
So what exactly is cost management? The Project Management Institute (PMI) defines cost management as planning how you’ll spend the money, estimating, getting the financing, finding funding, managing and controlling the costs and of course budgeting too. There are four processes to project cost management.
Before we get in to the four processes of project cost management, let’s first have a look at some frustrating issues that can occur if cost management isn’t utilised, and the benefits of project cost management when it is.
If you are experiencing any of these frustrating issues then project cost management is really going to help you:
- Contractors or services providers, such as app developer for example, are costing way more money than you initially thought
- Your burning up too much money with getting your app/product/service to market and you don’t understand where the money is going
- You may have to scale back what you were originally want to do as you can’t afford it
- You can’t say right now how much money you have spent on your app/product/service and how much money you still need to get it to market
- Your investor or loan provider is riding your back wanting to know when there is a return on investment (ROI) or loan repayment
- You think you were too optimistic when setting your budget for your app/product/service and now you’re not sure you can even get to market
- Your under pressure and you don’t know what to do
So bearing in the mind the above, the benefit of using cost management as part of project management is numerous. Some of these benefits include:
- Investors and suppliers seeing you as a mature business owner that has a healthy attitude to managing costs. This will support them in having confidence with investing in your business or extending lines of credit to get your project going
- If you are providing a service clients will feel confident that your cost management is sustaining your business and won’t lose you as a supplier. This is particularly relevant if you are trades person or run a business where you do high value renovations/construction/land scaping etc
- Have a realistic view of what your project costs are and when you are consuming costs. Then this will support you with understanding your business cash flow
- You have a good degree of certainty with what your costs are to execute your project and get your app/product/service to market
- You know how much you’re spending and on what
- You are still able to afford to get your app/product/service to market as you originally planned, if not better
- You have a good degree certainty with how much you have spent to date and able to answer questions off the top of your head
- Your investor or lender is comfortable with how you are managing your costs and you can produce the facts and figures when asked
As mentioned before, there are four processes for project cost management that when done properly and in sequence will support you realising the benefits above. They are:
- Plan Cost Management. This is the process of how you will manage your costs and have a cost management plan. Here you will figure out what documentation and tools you need to manage the costs of your project, incoming and outgoing. The documentation you create and the tools you identify will support you with planning, managing, spend and controlling money.
- Estimate Costs. This is where you will figure out how much your project will cost. When you do this you will need to identify how much your staff will cost (including your own salary to draw from the business), expenses, costs of suppliers, costs of contractors, costs of any premises that you will need, cost of council permits if needed etc. You will also need to figure out the costs of activities (from your project schedule).This is step one in creating your cost baseline.
- Determine Budget. So once you have your estimate and costs of activities this will help you to understand the total cost of your project, which you will hopefully have enough money for. If you do then this is your budget, if you don’t you will need to eliminate some activities or scale the costs back to what you can afford. When you layer these costs in to your project schedule you will then have a budget profile where you will know when you are spending on what. This is step two in creating your cost baseline.
- Control Costs. Here you will use your cost management plan and use the documents and tools you created earlier. Together with your cost baseline you will be able to track your actual costs against your baseline costs, see the variance in what your spending to what you planned, and take any corrective action to rein in costs. This information will help you give the facts and figures to investors or loan providers when needed.
By following the above it gives you the understanding to manage your project costs, give you control on costs flowing in and out, plus show to investors and suppliers that you have a mature and healthy approach to managing costs.
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