Cost cost cost - keep it simple

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Cost Cost Cost: Keep It Simple

“Without business, there is no profit, and without profit, there is no business”

During a financial due diligence, in addition to look at the revenue (we spent a lot of time on

this), is cost. Some said, cost is the “enemy”. Not all people can explain away very well about

the company’s cost and it always intrigued me.

Cost, whatever it is, should be kept simple, even in its ‘account name’. As simple as it is. When I

saw the company uses so many accounts to book its costs and using so many approaches to

allocate its costs, I guess they want to confuse, instead of making it clearer, the readers of that

financial statements.

Talking with persons with different backgrounds in the company, especially the company with

specialized industry and products, in many times, a bit confusing to me. The technical language

will be very different. Take a sample of airline industry. Costs could be related to many different

types of plane models, but at the end of the day, towards the end of the discussion, I could say,

as an outsider (and somebody from finance background), I don’t know much the difference

between one type of commercial airplane from the others (for example, Boeing commercial

models, 707, 717, 727, 737, 747, 757, 767, 777, 787, and more to come). Yet, one thing I am

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pretty sure, they are all marginal costs, they are same like other costs, the difference is just,

they put “wings” on that cost.

Sometimes, as I joke, I will say to them, even I don’t know what the difference between “bolts

and nut”. To me, they are called “cost” and I prefer knowing them lesser than more.

Not all costs are the same, similar to not all revenues and cash flows are the same. The

certainty of costs in many cases are higher than the certainty of revenues and cash flows that

the company will be able to make, generate and sustain in the future.

Though per textbook in the university, costs are mostly segregated into fixed cost, variable costs

and semi-variable costs, and discretionary costs. Yet, I guess, we need to see ‘more costs” for

“keep the company having a competitive advantage” and lesser costs for “just being in the

market”. Competitive advantage is like a virginity, much easier to protect it than to get it back

once lost.

The company should focus on activities, that instead of whether they are “value added” or not

(as many MBA textbook teaching us), but I believe, it is easier, instead of arguing “value-added”

or not”, whether it is destroyer of company’s profit. Some people will argue that reducing cost

could hit the company in the long run, yet I believe, with now, the world becomes so “flat”, long

run could only mean as short as 1 year from now.

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Economy & Finance

Cost cost cost - keep it simple