Precise cost allocation

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Dear CFO…

The Digital transformation is a reality – and if you ask me, I’ll say that it’s always healthy to challenge the way we run our businesses by questioning our traditional perceptions of a given workflow. Digital tools lead to new methods, that’ll simplify our working life. Especially tasks like registering employee expenses, but also how we acquire knowledge and become wiser about the profitability of our employees, company, customers and partnerships. More specific, I’m thinking about the way that we allocate and attribute costs between the company’s departments, projects and customers. In Finance, you’ll receive different types of costs from employees and then you split and allocate costs to the right account. I believe that embracing technology will make this process smarter – and at the same time delight you with more accurate results.

I’ve said it before. Today’s CFO is more than an administrative role, who’s primarily responsible of traditional bookkeeping, accounting and reporting tasks. You are a problem solver and a trusted advisor to the company – and an important resource that help set the long-term strategic agenda. To fulfil your responsibilities as a CFO, you must keep up with the opportunities within finance-tech and fintech – and utilize it as a driver for your digital transition. That’s how you’ll improve, and it’ll be easier for you to run precise profitability analytics of customers and special activities. And who doesn’t dream about showing the complete picture of a customer’s profitability?

The real overview

Activity Based Costings (ABC) is a well-known method for allocating costs to specific activities, say a specific customer. The exact insight into which customers that are profitable or non-profitable requires that all costs are taken into consideration. This includes major costs, such as a high customer service level, but also minor costs such as mileage and employee travel expenses.

You need details about every cost to obtain the correct picture of a customer’s value. This is where it gets difficult for some companies. Transparency and traceability are important for the way you handle costs – and this can be a difficult financial workflow, if your data aren’t easy for you to access. It requires a process and a system that captures the costs as they arise, and then immediately allocates or links them to the right account. Once again, digital tools steal the spotlight and give you advantages.

Digital handling and dimension control

With a digital system that handles cost registrations such as travel expenses, mileage and time spend on a specific customer, it is possible for you to move the accounting task to an end user or an approver. The dimensions are chosen by you. This means that the allocation of a cost to e.g. a given customer can happen at the same time as the end user registers an expense. Put in another way, the cost is allocated during the same second that it occurs. It also applies to cost splits. It’s up to you to manage whether it should be the end-user, the approver or the finance department who is responsible for a percentage- or amount-based cost split. Hereby, the employee can allocate a cost himself to the right account.

But why move the task of allocating and splitting away from the finance department? Of course, it’s not all cost types that should be allocated by an employee, but in several situations, it makes sense. The methodology is worth to consider, as it’ll allow for precise cost allocation. At the same time, it’s possible to streamline and shorten the workflow between end users, the approver and the finance department. Travel costs are an applicable area, as it’s typically a large company cost that often isn’t accurately allocated. If you really want to know the exact profitability of a customer, this cost type is necessary to include. How many kilometers or miles does sales reps and consultants drive – and how many travel expenses do they have? – and exactly to what customers do these costs relate?

These specific circumstances make it obvious to let the employees allocate an expense using dimensions, during the very same minute he’s registering the expense. It’s unnecessary and a waste of time if this is left for finance to do. The employee already has the needed information to properly manage the cost. Always remember, that it’s easier to allocate a cost when it occurs, rather than allocating it at a later point in time. Though, you also need to remember, that it requires a process and system to manage it accurately.

Your strategic co-player

A digital process can be your new strategic co-player when it comes to financial management. A sloid workflow and easily accessible information will put you in a good position to advise the business about customer priorities, activities and define future goals together with your management colleagues.

Also, this will give you relevant knowledge about internal consumer behavior. Dimension control and expense registration are essential for digital documentation and reporting, both retrospective and in real time. Digital expense management makes it easy to collect facts about the spending patterns of employees, departments or specific cost types. The effort in controlling employee expenses is straightforward as reporting opportunities are just a few clicks away.

By leading the way of a digital transition, you are strengthening the company’s financial processes – and not least, your strategic foundation to guide and advise the business on profitability and future goals.

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