Cost Control Techniques

Cost control techniques can help a company pose good financial results and overcome difficult situations with ease. Read on to know more about the definition and the methods to control cost.

Cost control can help a company determine if it is really spending more than it should. Though it is not essential to be a finance expert to understand the definition of cost control, planning and actually implementing the techniques can be quite a big challenge. The next few paragraphs will give you more information about managing costs.

Techniques and Ways of Controlling Costs

The first step in the management of costs is to find out the cost centers and arrive at a conclusion in how much percentage they differ or vary from the standards of the industry. It is also important to study how the close competitors of your company manage to control their costs, and in turn, maximize their profits. Before discussing the methods, it is very important to carry out a proper cost analysis. The costs incurred by all the departments of the company should be considered, so that you can chalk out smart strategies to overcome these financial problems. It is very important to find out the exact and relevant reasons the costs of the company are more than the standards adhered to by the industry.

The most important of all the cost control techniques is to appoint a small team of highly qualified and experienced people well versed in financial management to manage the daily finances of the company in a professional and systematic manner. The finance team should take correct decisions in favor of the company and opt for less expensive materials and resources for the company without compromising on their quality. You should be very clear about the number of employees you require for a particular project. There are many companies who find it difficult to earn decent profits as their employee count is way beyond the necessity. You can also consider the idea of recruiting employees on a contract basis to cut down your costs. While deciding how much salary to pay to a particular employee, you need to be very careful. You should decide the salary strictly on the basis of overall performance. Instead of giving awards to the employees in the form of frequent salary hikes, you should give out bonuses to eligible employees. Following practices recommended in cost method of accounting may benefit your company.

In the times of recession, many firms resort to cost control techniques such as reducing extra facilities to employees, such as recreational facilities. Such techniques might also include cutting down the expenditure incurred on traveling by air and luxury hotel accommodations in order to harness the cash flow. As a part of cost cutting, few firms may postpone or cancel their plans of acquiring new companies, investing in new businesses, and buying new machinery or systems. These techniques should be utilized to save money and bring back the financial strength of the company.

The cost control techniques used by different organizations are different and are largely dependent on their business model and strength of their balance sheet. The better the implementation of these techniques, the better would be the future of the concerned organizations.

conomic Factors Affecting Business

Both international and domestic businesses are often affected by the dynamic economic conditions prevalent in the market. Factors like demand and supply, interest rates, recession, inflation, etc. often have an impact on the businesses.

Every business has one goal, to maximize its profit. This can be done by analyzing the demand of consumers, providing appropriate supply, along with maintaining quality of goods and services. However, there are many factors that affect this simple operation. Owing to these economic elements, the sales, production, and procurement of a business get adversely impacted.

Economic Factors That Influence Businesses
Demand and Supply
The demand and supply are two principal factors that affect the working of any business model. The demand is the will and ability of consumers to purchase a particular commodity, while supply is the ability of the business to provide for the demand of consumers. Suppose, a mobile phone infused with latest technology is introduced in the market, it will have a higher price because of its demand in the market. Its prices will continue to increase if the supply does not meet the demand.

For instance, in the year 2000, weather played havoc with the sugar crops of Brazil, which is the largest sugar producer in the world. This led to a decrease in the supply of sugar, which in turn resulted in a steep rise in the sugar prices. However, after the initial price rise, the market forces came into play and the demand for sugar became equal to the supplied sugar.

Marginal and Total Utility
Utility is the amount of satisfaction, that is derived by consumers from the consumption of goods. It so happens that after continuous and successive consumption of units of the same goods, the satisfaction that is experienced by a consumer starts decreasing. This often results in short-term or long-term fall in sales. Some organizations prepare for the launch of another brand, before the fall in utility and sales is experienced. The launch of new brand ensures that the revenue trend of the business does not fall. Diminishing utility is among the external factors affecting business.

For example, when we buy a pizza, the first few slices give us immense satisfaction. However, there is a fall in the satisfaction levels, when we are eating the rest. Let’s assume, the marginal utility derived on the consumption of the first slice was 90. However, due to diminishing utility, the second slice had the score of 80 and the third slice was just 70. The satisfaction derived on consumption will be in a decreasing order.

Money and Banking
Banking facilitates monetary and fiscal policies that affect business and also the customers of the business. Money in circulation dictates the purchasing power or rather the demand of the consumers. On the other hand, the banking facility dictates the borrowing capacity of individuals as well as the business. The banking policies play a decisive role in affecting the prices of goods and interest rates along with investment and asset prices. The monetary polices of countries also influence the economic activities and inflation. This whole dynamic process is also known as monetary policy transmission mechanism.

Economic Growth and Development
Economic growth dictates the amount of finances that the society at large is earning and development indicates the volume of money that is being invested into channels of long-term upgradation. Among all the economic factors, development is the most important one, as a business has to cater to the demands of an economically dynamic society. For example, the luxury brands perform well during an economic upturn, much more than the companies which produce essential offerings.

Income and Employment
Other important aspects of the economy that affects a business operation, are the employment density and rate of income. The per capita income and density of employment determines the rate of demand, density of demand, and also the purchasing power of the people. For example, during an economic upturn, there are employment opportunities which generate income that enables people to possess a stronger purchasing power. On the contrary, as the employment density and income rate go down during recession period, the purchasing power of the people also diminishes.

General Price Level
Another very important aspect of the economy that plays a part in the growth of business is the general price levels of commodities. Costs of raw materials, paying power of people, cost of production, and cost of transportation are some of the most important components that determine the general price levels and in turn, lower the profit margin of a business.

For example, an increase in the price will reduce the total revenue generated as there might be a dip in the demand. Let us assume that we have bought 16 pizzas for the price of $4. However, after an increase in the price of pizzas, we may get to buy only 8 pizzas even after shelling out $6.

Trade Cycles
A trade cycle plays a part in fluctuating the costs of goods and commodities in an economy. Prosperity, recession, depression, and recovery are the phases of a business cycle that affect the demand and supply of all goods. Also, trade cycles often affect the general price levels of essential and non-essential commodities.

Inflation is a phenomenon that occurs when there is too much supply of money in the economy that is not supported by the output of goods and services. As there is a lot of money floating around, the prices of goods also increase in order to sustain the businesses, resulting in the increase of costs of raw materials which are needed for production. A hike in the prices of raw materials, thus, also increases the cost of a product.

In simple words, the buying capacity of people decreases, when their incomes remain constant but the prices of products and services increase. This affects the demand for the goods. For example, in 2008, Zimbabwe faced the worst case of inflation, which proved disastrous for its economy and led to the abandonment of its currency.

During recession, companies face a decrease in sales revenues and profits. To curtail cost, they resort to cutting back on hiring new employees, making capital expenditure, marketing and advertising expenditures, research and development activities, etc. This not only affects large organizations, but also the small ones which act as vendors to these big companies.

Smaller organizations may find it difficult to survive in recession due to lack of financial funds or availability of loans. Also, people may shift their preferences to slightly affordable products during recession or may not spend on luxury items at all. This will also have a negative impact on the demand for these products. Factors like falling stocks, lack of dividends, below par quality, employee lay-offs, bankruptcy, etc. during recession may also affect the business adversely. For example, in 2007, when the banking industry was unable to face the meltdown of the mortgage market, it inadvertently led to a free fall of the stock market and a decrease in consumer spending. It also set into motion a chain of events that resulted into a global recession within a year.

Exchange Rate
When a company buys certain goods from a US-based organization, it will have to convert its currency into US dollars for making the payment. If the currency of the buyer is stronger than the US dollar, it will be beneficial for the company. However, if it is weak, the company will have to shell out more money. This was an example of an export business. A similar logic will also be applicable to the import business. Moreover, price competition in the international market often leads to fluctuating prices. This is because a foreign company in the US market may increase or decrease its prices depending on the changes in the exchange rate.

Suppose some time ago, 1 pound was 1.5 US$. However, today, it may decrease to 1.3 US$ if the value of dollar appreciates. This will cause the imported goods from UK to become cheaper for the consumers in the US. However, this will not be a good news for US exporters as UK consumers will find that they are getting lesser returns for a pound’s worth.

Rate of Interest
The rate of interest has a direct impact on the loans that business take to sustain or propel their growth. The higher the interest rates, businesses find it difficult to commit to projects that require investment. On the contrary, lower rates make it easier for people to borrow money in order to buy cars and houses. Low loan rates also provide an opportunity to people to spend more on other things, thus creating a demand for various goods and services, and thereby spurring the growth of economy.

Government Regulations
There are several government agencies that regulate businesses for the safety of humans, animals, and environment. Some industries are heavily regulated and introduction of new laws discourage uncontrolled growth of factories and plants. For example, a coal-powered power plant may be asked to be shut down because of an environmental threat it poses. This may affect a business drastically.

Every changing factors in an economy affect the working of businesses. Hence, companies need to have a foolproof strategy and contingency revenue reserves to cope with such dynamic changes. It is best to take calculated risks and expand a business when the rates of interest are low and the demand is high.

Top Management Consulting

Management consulting is a sought-after, high rewarding field of work for many. The profile of a management consultant is considered among the highest paying jobs. It is a job that demands filling up technical gaps that exist in an organization to improve its productivity and efficiency. The management concepts are the cornerstones of these firms. Firms hiring such consultants are many, but the ones that top the list are only a few. Getting there takes a great deal of effort, which includes formal training and a good work experience. Consulting firms are breeding grounds of the best intellectual, analytical, and creative minds in the present day’s highly competitive and fast-paced corporate scenario. Here’s taking a look at list top firms with a brief overview.

Leading the list is Accenture, the world’s largest, and the most famous. It is considered to be a leader in the areas of systems integration and business process engineering. The company has presence in over 80 countries around the globe. Accenture is a spin off, of Arthur Andersen Consulting, a famous firm in its own right. Accenture grew bigger in terms of revenues and presence than Arthur Andersen by 2001.

Closely following is McKinsey. This is a privately owned management consulting firm with more 80 offices around the globe and odd 15,600 employees. This firm also finds itself in the top financial consulting firms. McKinsey has divided its work in 7 broad verticals, each having its own specialist skilled consultants to provide thoughtful, in-depth solutions to any problems the client might be facing. McKinsey’s clients range from nearly every sector and from every country, from automotive giants in U.S. to some government department or NGOs in India.

Deloitte Consulting
Consulting arm of Deloitte & Touche, Deloitte Consulting has a workforce of 15,000 professionals spanning over 33 countries. The impressive list of clients comprises more than one-third of companies in Global Fortune 500 list. It’s services includes consulting for tax advisory and financial advisory services, strategic and operational management consulting. Managing consulting verticals also include strategy and operations management, technology/systems integration and human capital. The main targets of this consulting firm are public sector, real estate, life sciences and health care, consumer business, financial services, manufacturing, technology, media, and communications, energy and resources, aviation and transport.

Boston Consulting Group (BCG)
Privately held management consulting company, Boston Consulting Group (BCG) was established in 1968 by Bruce Henderson. Their major claims to fame have been contributions to management theories and practices, like the BCG Matrix for example. With 6,000 employees spread over 65 offices, this is one of the top most firms, as none can match their high quality strategic consulting work. For those seeking high management consulting salaries, this is the place to be. This intellectually driven company has an insightful and out-of-the-box solutions for its esteemed list of clients.

Bain and Company
Focus of Bain and Company is at developing and increasing operational efficiency and developing marketing strategies. Bain is also heavily involved in consulting in financial domains like mergers and acquisitions, private equity investments and transformation plans. Bain has over 4,000 professionals and shares a close affiliation with Bain Capital, an elite private equity firm, known for outstanding large investments.

Booz & Company
The oldest management consulting firm Booz & Company, was founded in 1914, and was the first one ever to coin the term “management consultant”. It provides consulting for both public and private sectors. The company employs more than 3200 people operating in 57 offices in 33 countries. Booz Allen Hamilton, is Booz’s venture which only provides consulting services to the U.S. Government.

PricewaterhouseCoopers LLP (PwC)
PricewaterhouseCoopers LLP (PwC) is one of the world’s largest providers of assurance, tax, and business consulting services. With 757 cities across 154 countries and employs over 161,000 people the company posted a profit of $26.6 billion in 2010. It is the largest provider of management consulting jobs related to accountancy. This is the reason why PwC hired a number of CFAs, CAs, and lawyers.

Profits posted, businesses acquired, and returns yielded on investments decides the management consulting firms’ ranking. Such consulting firms usually work on a hybrid model of pricing. Traditionally the firms billed the clients solely on the basis of time and material. In this model, the consultant’s man hours and other out of pocket expenses or overheads were charged to the client. By the mid 2000s there was a dramatic shift towards a more result oriented approach to pricing, and the two models have been combined and adopted by major firms to charge their clients.

World over there are many management consulting firms that deliver services in various areas of management and operations. Mainly we can define seven broad areas of management services that these firms cater to, namely, business technology, corporate finance, marketing and sales, operations, organization, risk, and strategy. Today many non-consulting companies and IT companies are making great strides in the world of consulting too.

Tips to Become a Finance Director

Finance director is a senior level position in the company management and is considered as one of the most respectable jobs in the world of banking and finance. This article will try to explain how to become a finance director.

The finance department is one of the most important departments in any type of organization. This department has to handle financial transactions of the firm and plan on investments and raising of funds for funding ongoing projects. As no project can be completed without money, the job of a finance director assumes further importance. Finance directors work in the areas like resource management, strategic planning, preparation of a financial budget for the financial year, supervising company’s financial performance and preparing financial reports for outside agencies like creditors and shareholders. Ensuring that the firm’s asset quality is high and debt levels are comfortable, are also some of the responsibilities of this job. Being the leading person in the department of finance, the finance director has to form teams, assign work and help in planning as and when they need. In short, the ultimate aim is to make sure that the firm achieves its financial goals or objectives in a planned way.

High School Preparation
Sincere efforts taken during this stage of one’s educational career pays off greatly. So, take special effort on subjects like economics, finance, mathematics, English and computer science while you are in high school. Get excellent grades so that you are not denied admission to top business schools to get deeper knowledge of finance.

Get Your Graduation Degree
Getting a graduation degree in accounting or finance is essential to pursue this profession. If you look at the track record of the Chief Financial Officers (CFO’s) of top companies, you will find that all of them have passed from top business schools. So, you need to try to do your MBA in accounting or finance from the top business schools in the US. As a student of finance, you should have ability in the following areas:

Financial management
Managerial economics
Management accounting
Costing and budgeting
Preparation and analysis of financial statements
Mergers and acquisitions
Fundraising through different routes

During the course of your study, you will be taught these subjects by expert faculties, hard work and passion for knowledge can lay a strong foundation for a successful career in finance.

Intern at a Major Finance Firm
During the business management course, students have to do their summer internships in financial and banking giants. Here, they get practical work experience and can apply their classroom knowledge. You will need to have good educational record to get internship at top firms in investment banking and asset management. A successful internship can help you get final placement in a top firm after you compete your course.

Become Auditor/Accountant/Finance Associate
After you complete your university education, you need to work as an auditor/accountant (junior level) initially for a few years. Then, with proven ability, you can become senior accountant or senior business analyst.

Become Assistant Finance Controller
Becoming assistant financial controller/assistant manager would be your next target after gaining experience in accountancy and auditing. By working at a managerial position, you will be able to sharpen your business skills and prepare yourself for future challenges. It would take around five years to become assistant finance controller.

Enter the Senior Management
To become a finance director, you first need to enter the senior management of the company. This is possible after gaining around ten years of experience in the field of finance. As a senior management professional, you will be involved in strategic planning, decision-making, chalking out expansion plans and fundraising. After spending some five to ten yeas in senior management position, you can then be eligible for this position.

The salary in this field can be between $120,000 to $300,000 or even more. By following the above step and taking keen efforts, you will be able to secure your career in the future.

Crowding Out Effect in Economics

During the great recession of 2007, government deficits had increased a lot, since the government had to incur huge public spending for the masses. However, the ultimate result was that it did impact the business sector, and they ended up being crowded out. Thus, government spending does have a negative side too, though it has been overlooked.

The dictionary meaning of the term ‘crowding out’ is thrusting out, or forcing out of a small place. However, in economics, the crowding out effect is an interesting phenomenon that deals with the government spending. Government deficit is a situation when the government ends up spending more than the borrowing. What does the government do when it is short of money? Simply mint money? Of course, not! Money circulation is not so easy, and the government cannot start printing money simply as per its wishes and whims. Too much circulation of money will not lead to an increase in the value of the goods or services, but will certainly increase the inflation rate in the economy.

Why does ‘Crowding Out’ occur?

To reduce the deficits, the government again borrows from the market. Since the fiscal policies of the government impact the economy on a much larger scale, it does affect the private sector of the market. Due to the increase in government borrowing, the demand for investments in the market increases. Automatically, the price of funds increases. It implies that this increases the rate of interest in the market.
Hence, increased interest rates in the market again have an impact on the private sector. The private entrepreneurs cannot borrow much, once the interest rate of loan funds increases. In this case, they may stop or curb their growth or expansion plans. Thus, the government sucks up or absorbs the money circulation in the market, thereby creating a crowding out effect in the market.

Interest rates and borrowings have an inverse relationship. Once the interest rates increase, the borrowings decrease and vice versa. The government can create a crowding out effect in many ways.

Issuing government bonds in the market

The government borrows from the market, by issuing bonds and securities. Other than that, there are compulsory savings in the form of pension funds and other security benefits. When such bonds are circulated in the market, people tend to invest in them due to their high credit rating as compared to the private sector. Thus, much also depends on the mentality of the investors. If they prefer to have risk-less investments, most of them will divert their savings to the government.

Increase in public sector spending
Consider that the government spends on donating to a public institutional store. The goods are available at rationed and subsidized prices in that store due to benefits given by the government. Thus, customers will prefer to buy goods from the store rather than buying from private local stores. Thus, indirectly, public spending leads to losses for private individuals in the market.

Increase in tax rates
When taxes rise, the savings of individuals in the market reduce, and hence, there is less money in the market to invest. Thus, the money is diverted to the government’s funds, which they use for public spending. However, due to this the private entrepreneurs are at a loss, since, when supply is lesser than the demand, prices will ultimately increase. Thus, it withdraws money out from the private market’s pocket to the treasury of the government. Studies have also shown, that once taxes increase, private individuals tend to make less donations, since they have less savings and there are public contributions made by the government too.

Impact of the increase in government borrowing on the economy

The crowding out effect might not be too tough in the market, and may not impact the economy much. However, much depends on the economic conditions during that time. Thus, if it is coupled with an increase in the savings of the individuals in the economy, its impact might be washed away. If the increase in borrowing by the government is not too aggressive, and the economic conditions in the market are conducive, it might have a very subtle impact on the borrowings of the private sector. Much depends on the interest rates rather than the increase in government expenditure.

Thus, it can be said that increased government spending has its own set of pros and cons. Though the government spends on public welfare, the private sector does suffer in this bargain. Of course, its impact might not be that harmful to the economy and is influenced by many other economic factors such as investor’s psychology, technology, international trade, etc.