How to break down business controlling to understand what is made of

We can look at the business as a group of people who do things and make decisions left, right and center in a more or less coordinated way. Now, via accounting, the combined effect of all those actions and decisions is translated into a financial result. Business control is about understanding why that result turned out as it did. 

How complex a business controlling system is depends on the complexity of the business. But let's take it step by step.

The first level of understanding is the nature of the costs and revenues in the business. For example, a raw material cost or a consultancy cost. We do that by defining cost and revenue elements, also known as accounts. They tell us the types of revenues and costs we had and for some business that do only one thing in one place, that would be enough. 

For companies that do more things in more places it is useful to know where costs have occurred and why. Here we start using cost centers which are basically pools of costs based on responsibility and purpose of resource use. For example, a maintenance manager has a cost center where salary cost, tools and other costs are all grouped together. 

All cost centers have some kind of output. Company resources are used for a purpose and their output can be either activity hours, or products or whatever we choose as a measure. So, another element is the resource output.

At this point we know the types of costs we have, we understand where they occurred, with what purpose and the amount of output produced. The next step is to connect the output of each of these buckets with the products or services sold by the company. This part is called product cost controlling. We now understand how the company's resources are "consumed" by the different product or services that the company is selling.

Next step is to put together the sales prices with the customer base and the product cost and do what is called profitability analysis. When we get here we have understood how value flows within the company and what is driving the financial results.

Having control over the value flows and understanding how changes affect profitability is the backbone of business control. As with anything else, to get that understanding you need to break it down in smaller blocks and figure out how they relate to each other.

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