The purpose of cost management is to ensure adequate supply of funds from the right source at the right cost and at the right time to the firm to meet its funding needs. In this connection a cost benefit analysis of various alternative sources must be made before acquiring funds from any particular source. Financial activities have undergone tremendous changes, the cost management, therefore gained much importance over the time.
Significance of Cost Management
- Determinant of Business Success- Sound cost management is the index of the success of an enterprise, its existence and growth. Cost management makes possible the use of available resources in the form of men, materials and machines more effectively. Thus, it helps in preparation of plans for development & expansion and their successful executions.
- Focal point of Decision making- It provides scientific analysis of facts and figures. This helps on evaluating the profitability of the project in the given circumstances so that a proper decision may be taken to minimize the risk involved in the project.
- Measurement of performance- The performance of the firm can be measured by its financial results i.e. by the size of its earnings. Risk and profitability are two major factors which jointly determine the value of the firm. Financial decisions which increase the risk will reduce the value of the firm, and on the other hand, financial decision which increases the profitability will enhance the value of the firm. Therefore, risk and profitability are two essential ingredients of a business concern as observed, financial decision affect the size of earnings stream or profitability and the riskiness of the firm. Policy decision affects risk and profitability.
- Advisory Role- It plays a very important role in the success of a business organization by advising top management. It represents important facts and figures regarding financial position and performance of various segments of the firm to evaluate the progress of the firm and to amend suitably the principles of the firm.
- Optimal Utilization of Resources- Sound cost management emphasizes the optimum utilization of resources of the enterprise. In fact, the failure of a business enterprise is not always the result of inadequate finance but it is the result of defective management of funds. Effective cost management plays the important role in the maximum exploitation and utilization of the enterprise resources. Effective utilization of financial resources is of great significance. It gives maximum returns by increasing the productivity of capital funds.
Source by Kevin KM Meaney