It is important to understand why there is no such thing as the cost of something (implying there is only one) but only a cost (i.e. one of potentially many)
These are the reasons:
Costs are calculated and presented by people and are affected by:
Here are the usual suspects:
If management does not write down inventory that has become obsolete they are overstating profit. If they make unnecessary write downs they reduce the profit figure. This affects costs.
Debtors (Accounts Receivable)
To reduce profits management can make provisions for bad debts that are too high. On the other hand, if they fail to make the necessary provisions profit will be overstated. This affect costs.
Fixed assets lose value due to market forces (second-hand assets are worth less) or wear and tear due to usage – or a combination of both. This loss in value (depreciation) should be reflected in the financials by charging the depreciation to the Income Statement and reducing the value of the assets on the Balance Sheet by the same amount. The amount of depreciation is determined by deciding on the estimated useful life of the assets. A longer estimate of the useful life will result in higher profits – and a lower estimate will result in lower profits. Estimated useful lives are arrived at subjectively which also affects costs.
At times when the economic situation seems to be deteriorating many people use this as an excuse to sit on their hands. They delay decisions about investing in new equipment, cut back on advertising, stop investing in the development of their staff and get rid of employees. Times like these also provide excuses for those who tend to procrastinate.
But there are businesses that are doing the exact opposite. This is because there is still a market out there, consisting of people or businesses that have problems that need to be solved. This is what businesses do. They solve problems. These problems have not gone away. So what is needed is an identification of problems in the market because in tight economic times problems still need to be solved. Are your customers are trying to cut costs. What can you do to help them?
You need to make a difference in your customer’s lives. Why else would they buy from you?
I know of businesses that are buying other businesses to expand their capacity, taking on new staff, developing them and investing in new equipment.
Even in countries that are in dire economic straits (think: Zimbabwe, the DRC) I know people who are starting businesses.
The South African economy has had its peaks and valleys for decades but there are always businesses that benefit from growth and decline. Get out and see more people. Focus on selling solutions not your goods or services. Listen to your existing and potential customers. Show customers you care about them.
If you’re standing still the world is leaving you behind.
But remember there is no need to race on the bottom on pricing. What you offer is something that will benefit your customers. What you have to offer must be different.
It’s time to sharpen the sword - not sit on your hands.
I demystify financials for groups of managers across all of Africa