What Is Your Costing Zone?
Lot of companies begin their journey into EPM with automating Management Reporting or otherwise also called as Profitability Reporting. While automation is more about the ability of the technology, automation for Management Reporting is a bit more process driven. We recommend companies who embark on such a journey to use this as an opportunity to bring in a holistic change to how costing is done.
What we refer to Costing here, is the level at which costs are captured in the Financial System of Record. Given the fact that, financial structures don’t generally catch up as fast as the business moves, there are sometimes some compromises that need to be made when costing is done. Also, in some cases, it is just not possible to capture cost at the lowermost possible level due to multiple factors.
There are in general 3 types of Costing (all Costing we refer here are at Gross Margin or Controllable Margin level), depending on the business
1. Top Down Costing – In this case the Financial System of Record would be at a very high level and would require operational systems to break it down further. For example, some startups use basic financial systems to just capture Revenue, Direct Costs while the further breakup of Revenue by Customer etc will have to be obtained either directly or indirectly through external third party systems like CRM etc.
2. Bottoms Up Costing – In this case, the Financial System of Record is pretty detailed and more or less captures anything and everything the business needs directly into the financial books. In Bottoms Up Costing, all financial elements above Gross Margin will be available in every cut possible directly from the ERP – example, Customer Wise Gross Margin, Region Wise Margin etc
3. Standard Costing – This is generally adopted by companies who are slightly higher in their maturity curve. Here, the Management Reports use Standard Cost drivers like rate to publish gross margins while the actual Financial System of Record can either be Top Down or Bottoms Up.
Our recommendation is to get companies to the level of Standard Costing but having a platform in place that can do proper allocations as well to look at the effectiveness of Standard Costing. Management Reporting is not the end output, but it’s a mechanism to address some fundamental gaps that exist in the Financial Processes and streamlining those as well in the long run. Success of EPM platforms is not only in the automation of Management Reporting but in facilitating the journey to Standard Costing and also eventually Standard Pricing
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