We are writing a series articles this January highlighting some relatively basic but very important accounting tactics that are often underutilized in organizations. The first New Years Resolution for growing organizations is an accounting commitment to tracking all expenses for each job, client, customer, project, and/or product, as relevant to the organization.
Accounting is often a very rudimentary and dry aspect of business life. Many small businesses and non-profits utilize their accounting systems primarily for monitoring net cash flows and tax related compliance. What is often underutilized is intentional accounting geared towards strategic decision making. A highly useful accounting treatment to increase the effectiveness of strategic decision making is cost accounting, or relating specific costs with a specific product, job, client, or project.
Three Steps to Get Started with a Cost Accounting System to Aid Your Strategic Planning
1) Analyze your costs and break them up into product costs and period costs. Product costs are costs associated with producing a product or delivering a service. Product costs can be difficult to discern for many service companies but at the very least, service companies should be tracking labor hours spent on each project or customer and tracking this as a product cost.
2) Using information for the past year, utilize variance analysis to analyze the efficiencies of different aspects of your organization business units or product lines.
3) Use historical data sets or industry data sets for further comparative analysis to make important strategic decisions about allocating resources.