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Profits through Activity Based Costing

Most people are aware about importance of cost control in achieving profit targets. However, very few organisations are prepared to put in the required efforts to control the various elements of cost. Most of the organisations stop at controlling material wastage or production costs like labor power etc. No doubt, these are major elements where costs can be saved. However, other elements are also important if really competitive price is to be worked out.

One has to consider the whole sequence of the processes including process of management and consider all the activities incurring costs in terms of materials, labor, energy, demand on resources etc. This should include all functions of management like marketing, administration, accounting ,personnel, materials, production, quality assurance and management,finance, development, MIS and so on. All the activities where there is no value addition should be preferably deleted from the sequence unless they are important from some other point of view.

When all such activities are removed from the process sequence,process becomes healthy due to elimination of fat. Next step is to have targets /budgets for process controlling parameters based preferably on internal benchmarking followed by timely monitoring of results,corrective actions like feedback and control and then performance evaluations and rewards.

When organisations pass all these steps people get motivated to improve the profits even going out of the way. Is it not very logical that if we carry out the right things in a right way eliminating non value added activities we are definitely working efficiently and effectively to satisfy our customers: obviously improving profits for the organisation.

Profitability and Benchmarking

Profitability can be improved only through value addition.Value is usefulness as seen by customer. Either more number of customers or more value per customer or both. If cost can be reduced, price can be reduced and number of of customers can be increased. OR some more features can be added and thus value as seen by customer can be improved with the possibility of fetching better price. For this to happen, constant efforts are required to do better than earlier. There should be benchmarks for every activity and our own set benchmarks can be taken to higher levels through improvements.

For benchmarking, one has to ensure correct recording of facts. If this recording is not true, benchmarks shall be irrelevant and future results shall be confusing. One can get records from other sources. However authenticity of these records is questionable since we do not have control over these sources. Also, the background conditions are different and may not be known and hence may not be comparable. Self benchmarking is better since conditions are controllable, known and hence comparable. Organisational controls can be effectively used to filter stray incidents from the records.

All these things are very obvious and one wonders why then organisations do not strive to achieve something which is not so difficult. Answer lies in internal feuds and lack of teamwork. Everyone wants to take credit for whatever good things are happening in the organisation. Top management should discourage such culture and encourage employees to own the responsibility for both good and bad happenings.

Profitability through honesty, evolution of culture and efficient effectiveness.

Purchasing personnel are considered to be most dishonest/corrupt by virtue of their profession.Marketing personnel are however expected to represent the image of organisation to outside world and hence deemed to be honest at least in reputed organisations.

This is true in many cases. However, there are exceptions. One organisation's marketing representative is dealing with his prospective customer's purchase representative and should know him well. It is possible for purchase person to be honest because it is entirely under his control. He need not accept bribes for offering purchase contracts and can insist on merit. The same is not true for marketing person.In order to stay in business he has to get orders from customers. It is not under his control to expect his customer's purchase representative to be honest. Thus, though marketing person may not like he has to be dishonest sometimes. Purchasing person however can stick to his guns and maintain honesty.

Why then purchase departments are branded as dishonest ? It depends on both the counterparts and the organisational culture brought up and encouraged by the top people whether honesty or corruption is promoted. No need to state that corruption shall eat away profits. Top management's role in improving profitability is through evolution of right culture and demanding efficient effectiveness.

Your comments please.

Profitability

In many organisations, people who calculate profit get more importance over people who earn profit for the organisation.This is how cost of finding out cost becomes more and profits are eaten away.However, people who earn profit for organisation are quite often reluctant to pay attention to keeping records and thus unable to prove themselves.

If people who earn profits for organisation are able to prove themselves, not only profits but also profitability shall get improved.Record keeping of all important good and bad happenings shall help improve utilisation of all resources efficiently and effectively and in turn shall improve operational efficiency of the organisation. This is what the management wants.

Efficiency and Effectiveness:How these two similar looking but actually different words are connected to each other and also to Profits.

Efficiency and Effectiveness are very similar looking but actually very different words used in the context of Performance. Efficiency is cost effectiveness; cost in terms of materials labour energy or anything consuming resources. Here the idea is to improve output for the same input or reducing input for same output. Effectiveness is a measure of result orientation. Here, consumption of resources is not that important but the Result is. When we combine these two words we are interested in both the cost and result. That is, we want to optimise both the cost and the result ultimately improving profits.

Here one thing must be kept in mind; cost of finding out cost should not be so high to so as to eat away profits significantly.