Think of the old parable of the frogs.  The first frog sitting in the kettle notices the water warming bit by bit but never considers the changes to be problematic.  The second frog comes by and tests the water and hops off, claiming it’s too hot.  The first frog scoffs and continues to sit in the kettle until the water reaches the boiling point.  Too late the frog realizes his mistake, making escape impossible. The first frog never recognizes the danger because he adapts to the incremental changes and dismisses them as minor annoyances.  Only when they accumulate does he realize his error.

Similarly in business, small changes in your factors of production may seem inconsequential on their own, but the accumulated trend may have serious ramifications.  To guard against this, there are simple cost control analyses, when performed routinely serve as a backstop to your intuition.  Cost analysis is the process of comparing current financial results with some standard.  By comparing results against time a trend is developed to indicate cost changes that are systematic rather than episodic.  Comparing current results against the budget improves future forecasting skills.  And setting costs against sales demonstrates how much of each sales dollar is consumed by individual cost items.  Using these simple cost control devices individually or together takes little time but provides insights that may not be intuitively obvious.  It keeps you out of hot water!

For these analyses to be valuable management tools it is critical that your financial statements are properly prepared to emulate your business processes.  Our Management Information Reporting service includes revamping your financial records to create an information system that provides timely and relevant signals to better manage your expenses.