"In short, the worst is yet to come, and for many people, 2023 will feel like a recession." This was the crucial message shared by the Chief Economist of the International Monetary Fund, Pierre-Olivier Gourinchas. It is therefore evident that the world economy is currently passing through a stage of uncertainty and the impact of the same will affect the Developed as well as developing countries. The rising inflation backed by the Ukraine-Russia war and the oil shortage are giving an effect of ‘rubbing salt on someone's wound’. Economic volatility is not a new thing to any country but in the current global scenario where every economy is connected, the impact of the same will be serious and may be disastrous to some.
Even though the recent report by the IMF cuts the growth forecast of the country, India stands as a bright spot on this otherwise darker horizon. What does it indicate? Is it enough for a country? How can the country overcome the possible future uncertainties? Will it fall into recession like many countries? What measures should it take to maintain the stability and to grow better?
Better economic infrastructure built up on a strong base is what every economy in the world is looking forward to. But to make it possible both public as well as private entities must go hand in hand. How an economy can survive in a difficult time and can manage a profitable outlook has been a question in this regard. The measures to take at this point is nothing but good analysis of the cost sector and a better management of the same. But unfortunately, the cost management now-a-days has just reduced to the concept of cost cutting by terminating employees or stringent measures of cost reduction. A reality check therefore is necessary as regards to what one should be doing to manage the cost rather than focusing on cost reduction alone. Cost reduction and Cost Management though sound synonymous to a layman, both the concepts are very much different. Without proper awareness of the same and a clear knowledge of what one must do to manage the cost factor of the organisation no company can survive in the future.
In 1991, with the introduction of NEP, by the then Finance Minister of Narasimha Rao led Government, Dr. Manmohan Singh, Indian economy saw an unprecedented growth. The opening up of Indian markets to the foreign companies and allowing private participation in various key sectors enabled our economy to see a tremendous growth. Globalization has given rise to many MNC and thus giving them the right to sell their products in our country and allow them to set up plants in our country. In the past one-decade foreign companies has shown great interest in India and they have started investing in India which has led a whole time increase in the FDI and FII in the country. For the past one decade, India has also seen a great interest from foreign companies to invest vastly into India, which led a whole time increase in the FDI and FII into the country. To be a destination for further FDI and FII, India as a country and Indian Companies must come up with measures to reduce the cost of production. If the cost of production is high, no MNCs would like to invest here.
The COVID-19, which had its iron fist over each of us, taught us that mere running of a business is not going to make any difference to the system at all. Instead, a very organized strategy and action plan regarding the management of the cost factor is necessary. As notably said by former Prime Minister of India, Bharat Ratna Shri Lal Bahadur Shastri ji, "Without cost accountancy one works rather in a vague undefined way without knowing where an industry exactly stands but in cases where there are cost accountants, correct assessment of its proper growth & working can easily be made." But it is very much evident that no company is seriously bothered about what will be their Cost Control strategy or whether they should have a Cost Accountant to control and manage the costing of the company.
In an era of digitalization, termination of employees will not result in cost control. Decisions must be taken taking into consideration each single aspects, starting from the development of an idea for business, till the product is made available to the customers and the after-sale services provision. The Material being purchased, the employees being laboured, the machines being installed, the time being taken for each unit of production, the quality of the product, the control system of the organization, the management of inventory whether it is in RM, WIP or FGs, the strategy of advertisement, the sales techniques being used, the customer support and after sale services, all needs to be considered with great care and caution. The role of a Cost and Management Accountant therefore is not just to see whether the total cost is reduced but it also involves a clear-cut examination of every nook and corner of the organisation to ensure a fair, reasonable, and equitable functioning of the organisation. Whether to make decisions like which product will be more profitable, which product should be produced more, whether production should be done or the same can be outsourced, whether a new proposal can be accepted, all these decisions depend upon the costing and the cost management of the organization.
The 2 major ways in which an organisation can increase its profit is, either by inflating the price or by decreasing the cost. While the former is a risky task, the latter is always a preferable option. Unfortunately, only a handful of companies are ready to go with the second option. Among them also, only a very few companies are ready to appoint a Cost Accountant to manage the costing areas of the company. Many Indian grown MNC having great and long experience in the field of business knows that Cost management is an important step to create a more profitable and viable business environment and they also implements the measures in their organizations. JIT Inventory, ABC System etc. are found to be practical and possible even by many of our own companies. But why are others not bothered about the same? How many Indian Companies are there, who are concerned about the introduction of Cost Audit in their organization voluntarily? Is Financial Audit enough for an organization? Why a closer look into the cost aspects is being purposefully neglected by many?
Learning about cost management can help one better comprehend how a company recognizes and categorises costs according to the requirements of the project or organization and why it has an imperative role in planning, controlling and decision-making. It is a process that takes in forming estimations, formulating budgets, and controlling costs. The objective of cost management, therefore, is to increase an organisation's productivity and enhance profitability. With proper management of cost and cost components an organization can reduce its future expenses and can make the organization more lucrative. The main objective of cost management is therefore to reduce the overall cost of the organization without compromising the quality of the product or service being produced or rendered. It is thus a mechanism which ensures cost control rather than cost reduction. A cost accountant unlike a financial accountant relies on both physical as well as financial information to create a system which ensures zero tolerance to quality issues but one which is at the same time enable the company or organization to create a more profitable business opportunity by cutting the unwanted costs which an organization may incur time to time. It is more like a control mechanism rather than an account maintenance. Cost Audit which is the extended and next level of cost accounting ensures that the cost data or information being provided is accurate and it adheres to the cost accounting plans. Cost auditing checks and verifies cost accounts’ accuracy, actuality, authenticity, and overall adherence to the company’s cost accounting plan. This involves not only the examination of cost accounts but also the fact that the plan prepared in this connection has been duly executed.
The reluctance or purposeful negligence by many companies however is not because they are unaware about the branch of Cost Accounting and the benefits it can bring into the company’s profitability, but because they do not what to spend any more money on another professional. For them, the final word is that of a Chartered Accountant. While the Chartered Accountants are best in their respective field like Financial Accounts management and Financial Audit, there exists a separate branch of study called Cost and Management Accounting. They are professionals who are more experienced and well informed in the field of Cost related issues. Mere Financial Account management or its audit is not going to bring profitability to a company in the current financial as well geopolitical scenario. While Financial accountants develop financial reports and file tax documents for a business, sideways with other services and comprises passing on business information to external authorities to certify it stick to legal guidelines, cost accountants analyse information for internal use and company advantage. By evaluating the expenses of production, cost accountants can aid companies customise their production processes, plummeting costs and improving performance. What a company or companies in general needs is to take a deep dive into the cost part, identify the areas which need corrections, make analysis of the cost statements, and take measures to improve the costing mechanism. In a nutshell Costing is the life blood of business. Starting from the very beginning of developing an idea till it is implemented and supplied to the customers the process of costing is spread across.
Cost reduction through the termination of employees and closing of branches or offices may provide short-term relief to the company but will not benefit in the long term. If the company is making losses or performing less than how it is expected to perform, then one should understand that these are just symptoms of some major underlying problem. Rather than treating the symptoms, the organization needs to work on the cause, which is, the mismanagement of Cost. The introduction of a cost accountant is not an additional expense it is an investment that you are making so that the future of the enterprise is made safe and secure. What needs to be done to overcome this disregard or purposeful disinclination from the part of the companies include, ensuring the maintenance of Cost Accounts and mandatory cost audit. Unless a necessity is created there is limited chance that the corporates will adopt the concept. The second need is the recognition of Cost Accountant under the definition of accountant under income tax act. The exclusion of the same is what gives a false narrative regarding the Cost accountants right now. A prosperous economy needs to adapt to the changing requirements all around. The existing and old school method of financial analysis is not going to bring any further improvement in the economic scenario of any organization. Therefore, it is high time that organizations accept and adopt the cost management, employ cost accountants, and consult cost auditors to ensure a safe and more profitable economic environment.
CMA Hrishikesh R Nampoothiri
mail id: hyadu12345@gmail.com
Mobile Number: +917560938431
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