Do you know the costs in your company?

A fundamental element in the modern management of companies is to understand in depth the different costs of the company and how they affect the outcome of the firm. In business management a good amount of time is spent on reviewing the results of the companies (sales, market share, profits, etc.). Unfortunately, experience indicates that many entrepreneurs/managers do not know in detail their costs (expenses) and therefore do not make the right business decisions.

There are three types of cost controls that are fundamental for a good management

1) Financial Accounting: It is the information that is used mainly by external users of the company (investors, bondholders, creditors, regulators, etc.). In Chile, the accounting system of the so-called Chilean GAAP was changed to IFRS (International Financial Reporting Standards), making possible to compare the Financial Statements in a quicker and more homogeneous way among companies. In this information, in an additional way, appear the main costs incurred in the year appear; Cost of sales (cost for providing services or selling the company’s products), Administration Expenses (marketing expenses, salaries of managers, etc), Financial costs (interest on the debt held by the company), Tax expense to earnings (provision of income taxes for profits for the year). Using this information, we obtain the main indicators of profitability and performance of the company (EBITDA, Net Profit, etc.). It allows investment and financing decision of the different agents.

2) Management Accounting or Operation: It is the information used within the company to make managerial decisions. For the above it is necessary to “process” the available information in order to make it available to senior management and executives in the best way. It allows answering questions such as: What is the cost of a product or a provided service? What is the cost of a sales channel? With which clients are we profitable? In general, the process consists of assigning all costs and distributing them according to criteria. Concepts such as ABC Costing, analysis of variance, KPIs, should be managed by management to better understand management accounting. This is an area of tremendous potential to improve in companies, given that a lot of effort is devoted to Financial Accounting, delaying resources to good management control operation.

3) Tax Accounting: Finally it is necessary to know the tax costs, since it is the basis to know the T.I. (Taxable Income) of each company, which is the profit on which taxes are paid, which is a negative cash flow. It should be noted that the Financial Accounting is not equal to the Tax Accounting; therefore, it is necessary to correct the first, so that it meets the requirements defined in the I.T.L (Income Tax Law) and obtain the relevant tax costs. With the latest changes in the I.T.L. for the tax reform, it is essential to understand well how the tax costs are affected.

In conclusion, we see that there are three types of cost control that are used for different purposes and that must be understood in depth.

Ernesto Solís
Partner – Fix Partners Consulting

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