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Five reasons you need to do a cost analysis as you prepare for 2015

by , 28 November 2014
Preparing for 2015 requires a fair amount of planning. You have to forecast, budget, set targets and create a financial plan.

But none of that is possible without a cost analysis. This is an important step in your 2015 preparations and decision making.

And that's not the only role a cost analysis plays in your business. There are five very good reasons to do one.

Today I'm going to show you what they are...

 
*********** Product endorsement  ************
 
Your accounting records are your business's Holy Grail!
 
Without them, your business can't continue to run. Management won't be able to make informed decisions regarding the future of the business if details about the company's past aren't available.
 
You must back up your records and make sure they're kept securely. Chapter A01 of the Practical Accountancy Loose Leaf will show you:
 
What are accounting records?
   What do accounting records generally consist of?
   Why it's important for you to keep accounting records
  
 
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Haven't done a cost analysis yet? Here are five reasons why you should

 
1. You can use a cost analysis to help you make healthy business decisions. This leads to healthy finances.
 
A cost analysis helps you evaluate the advantages and disadvantages of different decisions. This helps you make the best decision for your business. It will also help you understand all the risks and benefits. Without this step, you could lose thousands of rands because of bad decision-making.
 
2. It helps you look at all your costs so you can decide on the correct selling price for your product or service. 
 
Inflation goes up every year, increasing the price of certain products. Let's say your business uses a lot of water and electricity. Your cost analysis must include these factors to determine your selling price. Looking at all these costs helps you correctly determine the selling price of your product. This will ensure your business makes a profit and keeps on growing.
 
3. It helps you determine if you need more labour to produce your goods and services.
 
The more labour your business has, the higher your production, but labour doesn't come cheap. Setting up a cost analysis helps you see your product/service sales against labour costs. Look at the pros and cons to see if you can and need to hire more labourers.
 
4. A cost analysis helps get bank loans by showing the bank how healthy your business is. 
 
Banks want to see if your business is financially strong enough to take out and pay back a loan. A cost analysis helps you look at the financial health of your business. You'll also see if it's necessary to take out a loan to expand production. 
 
5. It will help you see if you're in a financial position to grow your business.
 
Let's say you have a business in Pretoria North. Now you want to open another branch in Pretoria South. A cost analysis will help you see what the initial costs to start up your business are. 
 
You'll also see if demand for your product is high enough to support expansion.
 
As you can see, cost analysis is a vital growth tool. It gives you the information you need to take your business to the next level. 
 
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Here's what will happen without a cost analysis

 
Without this information, your plan for your business' future may be unrealistic. 
 
For example, you wouldn't know if a new branch in Cape Town, with 1 000 employees, selling products at higher than normal price, will fail. 
 
This is because you won't know that demand in Cape Town isn't high enough and no one will buy your product at a higher than normal price. Because of that, you won't be able to afford 1 000 employees. 
 
So do a cost analysis for your company today so you know all your decisions for 2015 are the right ones. 
 
PS. Need more information on how to do a cost analysis for your company? Then check out the Practical Accountancy Loose Leaf Service
 


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