Showing Value (Part II)

Perhaps the single most important distinction you need to make is to separate cost reduction from cost avoidance. Why do I say that? It’s simple.

Cost reduction in operating expenses can, generally, be tracked to changes in operating costs on the income statement. Cost avoidance doesn’t have the same ability. So, if you try to add cost avoidance to cost reduction, and then report your total “savings,” you’ve just created an apples & oranges amount that has absolutely no relevance to the P & L statement that your internal clients look at on a monthly basis.

That’s not to say that you should not track cost avoidance. I encourage clients to have a robust tracking system that tracks operating cost reductions, capital cost reductions, and cost avoidance. Just never add them together, or you will lose P & L relevance.

More in the next posting.

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