Know Your Cost, Double Your Profit

Oct 31, 2013

Jennifer and I attended the Michigan Institute of Management Accountants (IMA) fall conference the other day, and one of the speakers, John Daly said that if you know your cost you will double your profit. I thought that was such an interesting idea, and I thought to myself hmm…is that true. I am not sure I would be as eager to say you would certainly double your profits, but it really does help.

Often times people think they know their costs, but when a formal analysis is done on the cost most people are surprised by the results. What they thought they knew to be fact, in reality, was false! It is interesting to see how the numbers actually do pan out. The issue is that prices are set based on these costs and if your costs are higher than you thought then obviously your margins are lower than anticipated. You may be saying, “well the market drives my price so it doesn’t matter.” It does matter! However, because you still want to control your margins. Maybe you need to be more diversified in your loss leaders, or maybe you didn’t realize you had a loss on your hands. There may be ways to cut costs, but you have to know the cost first.

If you say to an engineer or someone in your process we need to lower costs, I can almost guarantee you they will say they cannot. But if you say we need to cut the cost of this item by $.75, then I can almost guarantee you that they can do that. If you know the cost then you can know exactly what you need to cut by in order to make a profit. If you are arbitrary then they will be arbitrary about doing it.

So again I’m not sure I’d say you would double your profits, but I certainly would say you would increase your profits. Has anyone had the experience where they thought their costs were one thing, and then once they learned the true costs things changed? If so what effect did it have on your profitability? Moral of the story-know your costs!

Categories: Cost Accounting