What is Cost Visibility?

Cost visibility refers to an organization’s ability to accurately track, analyze, and understand all the expenses associated with its products, services, projects, and operations. It helps businesses make informed decisions, optimize resource allocation, and boost profitability.

It’s a lot more than simple expense tracking. To fully understand your financial health, you need to analyze your cost drivers, break down expenses by department, monitor trends and patterns over time, and compare costs against benchmarks.

By maintaining clear visibility into costs, companies can identify inefficiencies, control spending, and align their financial strategy with overall business objectives. Not to mention, it’s a necessity for regulatory compliance purposes and to maintain a competitive edge in the market.

Synonyms

Expense visibility
Spend visibility
Financial visibility
Cost tracking

Benefits of Cost Visibility

Maybe it goes without saying, but you need to know how much you’re spending before you can effectively manage and optimize those costs. It’s Business 101.

When you clearly understand and can point to the costs driving your operations, you can:

Identify the most profitable products
Comply with government regulations
Develop accurate budgets and forecasts
Direct funds toward high-value activities and projects
Identify opportunities for cost reduction and operational efficiency
Set optimal product prices based on input costs and desired margins
Foster a culture of accountability among team members and departments
Make data-driven choices regarding investments, resource allocation, and process improvements

Cost visibility is one of the building blocks of financial management.

For instance, retailers use it to track sales, margins, and inventory levels at each of their stores. They can segment this data by store, department, or product category, compare it with input cost data, and figure out which products are (a) most popular and (b) most profitable.

You can also spot the windows of opportunity for innovation and improvement. Let’s say you’re a SaaS company. You can use cost visibility to assess development, testing, deployment, and maintenance costs across each feature, module, or product version vs. their price.

How to Increase Cost Visibility

As you can probably tell by now, every company uses visibility in its own way, depending on its unique business model and industry. But there are a few critical steps everyone needs to take before they can achieve it in the first place.

Determine your cost drivers

What are the root causes of an increase in business expenses?

A cost driver is anything that has a direct impact on the cost of something else. For a manufacturing company, that could include raw material prices, labor costs, and power consumption. For SaaS products, it might be development time, server costs, and customer service.

There are two main types of cost drivers: direct and indirect.

Direct costs are the things that are directly related to producing a product or service, like raw materials and labor costs.
Indirect costs (e.g., rent, utilities, employee benefits) are not directly related to production but are still cost drivers because increasing or decreasing them will affect total costs.

Since an increase in the price or amount used of these things will inevitably lead to higher expenses, they’re precisely the things you’ll have to control when you’re trying to reduce costs.

Choose the right cost allocation method

Cost allocation (costing) is the process of identifying, aggregating, and assigning costs to cost objects (e.g., products, services, departments) based on activities that drive those costs. The goal is to allocate direct and indirect costs as accurately as possible to determine the actual cost of each product or service.

Some of the most common methods include:

Activity-based costing: Assign overhead costs to different activities based on the resources they consume — e.g., electricity (the overhead cost) vs. labor hours (the cost driver). It’s best if you have complex operations and multiple products or services.
Direct costing: Also known as variable costing, this method only allocates direct costs (i.e., those that directly contribute to producing a product or service) to it. It’s more straightforward than activity-based costing but can lead to inaccurate profitability calculations if you don’t consider indirect costs.
Absorption costing: This is the most traditional method of allocating costs, where both direct and indirect expenses are allocated to each product or service. While it provides a more accurate picture of profitability, it can be time-consuming and complicated.
Fixed or step costing: Here, you’ll group costs into fixed and variable components. It’s useful if you have high fixed costs, but it can underestimate variable costs in the short term.

You might also use a combination of these methods to allocate costs more effectively. For example, you could use activity-based costing for production overheads and fixed costing for administrative expenses, which are mostly fixed.

Use cost tracking systems

With effective cost allocation, you’ll know exactly how much each cost driver affects your bottom line on a per-product basis. But without proper tracking, you won’t have accurate data to allocate those costs in the first place.

You have to invest in software that helps you understand which costs are associated with producing each product or service. ERP, job costing software, and timetracking tools are all ways you can track your production costs and operating expenses.

Analyze your cost data over time

When you use software to track costs over time, you have the added benefit of being able to look back on your data to identify trends and patterns. This makes it easier to forecast your profits, understand the bottom-line impact of changes you’ve made to your production process, and benchmark your performance.

Using Cost Data to Improve Business Operations

As far as the actual improvements you can make to your business are concerned? There are many.

Identifying your business’s cost drivers

Cost drivers help you manage your company’s finances and forecast profits. When you analyze them, you’re making sure production costs don’t exceed revenue. From a management perspective, this is critical for resource allocation and strategic decision-making.

It’s also the starting point for understanding how different factors affect costs and identifying areas for improvement. Let’s say material costs are consistently high for a particular product. You might explore alternative suppliers or materials as a way to sell it at a higher margin.

Improving high-level decision-making

When you’re trying to assess the financial feasibility of a new project, expansion, or acquisition, your cost data is the first place you have to look.

Two reasons for this:

Historical cost data reveals potential risks, like whether similar projects have been unprofitable in the past.
It helps you determine how much financing you’ll need to secure and when you’ll need it.

When your team is seriously considering any type of major move, the whole committee or board will compare its projected costs with the potential benefits they expect in a cost-benefit analysis.

Enhancing operational efficiency

Cost visibility helps you pinpoint your business’s cost-intensive processes. Once you know what they are, you can take targeted action to streamline or optimize them.

Inventory management is another area where visibility into your costs is particularly useful. Carrying costs account for as much as 30% of your total inventory cost, so optimizing stock levels will help you bring expenses down significantly.

Your supply chain also presents several opportunities for cost reduction. Especially when it comes to your suppliers and shipping methods, keeping a close eye on costs can reveal cheaper alternatives that won’t compromise quality.

Holistically measuring performance

Cost data includes some of your business’s most important KPIs, like:

Cost per unit, per product
Operating expenses
Gross margin
ROI

These data points help you understand the impact of every business decision and every aspect of your operations on the bottom line. They also give each department in your organization a tangible way to measure their performance and contribution to the company’s financial health.

Setting optimal prices

Understanding cost drivers helps you calculate your total production costs and set product prices that reflect them. For instance, if 200 T-shirts cost $400 to make, pricing each at $20 yields $4,000 in revenue, giving you a $3,600 profit.

You can then factor in all your other business expenses (like rent and marketing) to ensure that your prices are competitive but also cover all costs and give you the profit margin you’re looking for. If you aren’t as profitable as you want to be, you then know you need to either raise prices or, if the market won’t bear it, look for ways to cut costs.

Supporting innovation

The first step in product expansion, a new product rollout, or any other kind of product innovation initiative is getting buy-in from your execs and stakeholders. To do that, you need to show the projected positive impact on your bottom line.

This is where cost data comes into play. By estimating all costs associated with a new product or initiative, you can create a clear picture of the potential return on investment, convince decision-makers to support your ideas, and collectively prioritize investments with the highest potential return.

Essential Technology for Cost Visibility

Several tools come together to paint the full picture of your costs. When considering software solutions, you have to think about where your cost drivers are coming from and which software will hold onto that data.

Here’s a look at some of the essential components of a cost management tech stack:

Enterprise resource planning (ERP) systems

Enterprise resource planning (ERP) software helps you plan and manage your inventory, orders, production, employees, finances, and more. Your finance and accounting departments use the data stored in your ERP to track costs, forecast revenue, and create financial reports.

Examples include:

SAP
Oracle
Microsoft Dynamics 365
Sage Intacct
SYSPRO

Your ERP will also likely have modules for product lifecycle management (PLM) and supply chain management functions like product sourcing, which are also crucial components of cost visibility. And it should integrate with your CPQ (configure, price, quote) for a seamless quote-to-cash process.

Business Intelligence (BI) Tools

BI tools are there to help you make sense of the vast amount of data coming from your ERP and other sources. These tools provide analytics, reporting, and data visualization capabilities to make it easier for decision-makers to understand complex information.

Examples include:

Tableau
Microsoft Power BI
Looker
QlikView
Domo

From a cost visibility standpoint, the most important thing about BI tools is their ability to consolidate data from multiple sources and present it in an easily digestible format.

This allows you to track costs across your entire organization, identify areas for improvement, and make informed decisions based on real-time data. As an added benefit, visualization capabilities make it easier to communicate cost information and the implications of a particular decision to stakeholders in a visually appealing and understandable way.

Financial management software

Financial management software is designed to streamline financial processes by automating the accounting, budgeting, and forecasting processes. It gives you a centralized platform for tracking financial transactions, managing assets and liabilities, and overseeing cash flow.

Several different kinds of tools play a role in the financial management ecosystem:

Corporate card and spend management sytems like Brex, Ramp, and Divvy
Accounting tools like Quickbooks, Zero, and FreshBooks
Payroll and HR tools like Gusto, ADP, and BambooHR
Expense management tools like Expensify, Concur, and Coupa
Billing software like DealHub, Chargebee, and Zuora
Financial planning and analysis (FP&A) tools like Anaplan, Adaptive Insights, and Host Analytics
Financial management suites like Workday, NetSuite, and Sage Intacct

These tools can also integrate with your ERP and other systems to provide a comprehensive view of your financial data. In some cases, your ERP will be a part of the financial management suite itself.

Cost Visibility