Prof Anil Kshatriya
In SME’s 'cost' is often considered as a 'given' phenomena. Junior level employees and managers don't think beyond their routine practices of producing the output as per the pre-defined standard. The entire focus is on 'output' side. There is little or no discussion around 'cost control'. Cost cutting is not the same thing as cost control. Owners of SMEs are concerned with cost cutting which often leads to resource cutting. Holding back resources has implications on behavioral aspects of the firm. Motivation of people gets affected and the quality of output suffers in a cost saving exercise. Such cost saving exercises are ad-hoc and discontinuous. On the other hand cost control is a planned and continuous process. Cost controlling may not always result in resource cutting. Changing the source of raw material by exploring better logistical feasibilities is an example of planning for controlling cost. But replacing the superior source of raw material with an inferior cheaper variant is what SME managers end-up doing as an alternative cost saving mechanism.
Tangible Cost System
Another important factor which affects cost efficiency of SMEs is the system of costing itself. Most SMEs in India don't have a well defined cost system which can measure cost of operation accurately for various cost centers of the enterprise. The process of costing is unscientific and vague. Direct costs are fairly traced to the final output but the method of tracing indirect costs and overheads is not appropriate. This results in wrong calculation of unit level product cost which eventually results into wrong pricing in the market. Indirect costs are usually bundled-up into a single aggregate expense and then spread across various products using heuristic basis of allocation like volume of production or labour hours per category of product etc. But such simplification in measuring and reporting of costs does not give a clear picture about how costs behave for each of the categories of products sold by a SME. Unavailability of unit level and product level data then becomes a major constraint in keeping track of costs.
The first step in building a culture of cost consciousness in a SME is to establish a proper system of cost accounting in the enterprise. Owners should look at expenditure on establishing costing system as investment which yields returns over a long period of time. Having a good system of cost accounting is not a statutory pre-requisite for a small company. Therefore the normal tendency of SME founders is to avoid spending time and effort in laying foundations of costing for a newly started company. But visionary founders and good enterprises always look at it as one of the key elements towards future success of their business. Indian companies who have galloped their operations from small scale to large scale are the ones who concentrated their effort on monitoring their financial performance from time to time. Modern manufacturing systems demand modern costing systems. SMEs should adopt techniques like Activity Based Costing for overhead cost allocation and customer profitability management. Activity based approach of costing traces costs to individual product category using cost drivers which drive the resource consumption. In an activity based environment a company can control the costs by controlling its activity driven resource consumption.
Awareness about Cost Control
The second step towards bringing a cultural change for cost consciousness is creating awareness about cost control among employees. Training managers to deal with cost data helps them in creating the right outlook. Review meetings must be held with discussions around how and what goes into product costs. Every section or department of the company must be made aware about the impact of their respective actions on overall cost of production. Suggestions and ideas must be welcomed across the organization in order to make the system of costing fully robust. Sometimes the owners fail to perceive an operational issue but the shop floor workers might have a better understanding of the problem at hand. A culture of cost consciousness can resolve such matters in timely manner and avoid undue complexities leading to drain in financial resources. Bottom-up communication should be encouraged rather than top-down unidirectional communication which lacks creative interaction. It may be a good idea to involve an external expert in reviewing the costing system because over time the system tends to become less dynamic.
Linking Performance with Management Control
The third and the final step for cost conscious culture in a SME, is to link the performance of people to the cost management process. Management control systems like budgeting and variance analysis should be defined to measure and manage the contribution of managers towards cost consciousness. Without linking rewards to performance, the possibility of continuing with a systematic approach for cost management remains low. Hence there should be standard operating procedures for achieving targets set for cost management and control. Innovative initiatives of managers for managing cost must be included as part of their appraisal for future progression within the enterprise. All the functions from manufacturing to sales should be given equal importance and weights. Cost effectiveness is not the responsibility of shop floor alone. Only when it becomes part of the entire organizational culture it finds meaningful acceptance across the enterprise.
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