Cost Management and Value Creation

The value of a company is a function of many variables. Costs are of special importance since managers can influence costs. Success at cost management has a phenomenal effect on value because of the relationships between costs, business risk, financial risk, and valuation. These relationships are non‐linear. Consequently, success in cost management yields amplified benefits in terms of value creation. In a counter sense, shortcomings in cost management result in an intensified eradication of value. Last, improved profits derived from cost management are “higher quality” increments to profits. Interestingly, the same non‐linear phenomenon holds: an increment to profits that results from costs management will have a greater addition to company value than an equal increment in profits that results from higher sales or higher sales price per unit. These reasons attest to the importance of attention to costs in value creation. Focuses on benefits of cost management in terms of: the reduction of business risk; the favourable asymmetric effect on the creation of value; the increased tax benefits since it allows, in fact calls for, an adjustment in the financing of the firm with attendant tax benefits. It offers additional considerations relevant in emerging cost control technologies such as activity‐based costing (ABC) and cost driver analysis. The issues also are consistent with the topical theme of relating organizational activities to value additivity.