Cost management plays an important role in a company’s lifecycle and is often the most underlooked aspect too. Accurate departmentalisation of costs helps in easier cost management and get a granular view of your startup’s outflows.

A startup should NEVER lump together expenses without categorising.

Why should you departmentalise costs?

I can go about 2 - 4 hours on the importance of departmentalisation of costs. Below, I will cover each reason and venture a bit into it to help you understand the “Why”.

1. Departmentalisation of expenses can help you keep expenses in check

At a startup stage, it is often so messy and the added stress of categorising expenses is a lot. But, it’s a must. With limited resources, the ideal situation to be is to keep a check on unwanted expenses.

After talking to several early-stage founders, we understood that the cost of using tools is outweighed by the convenience of using them. I am not against making your lives easier. Rather, I am all in for using tools and stop reinventing the wheel. But every often or so, a founder must check back to see if the costs are justified.

An example of a tool that is awesome but had the least use for me is Miro. Fabulous team for collaboration across teams. Being a small startup, we weren’t getting the value for the cost. Especially in Marketing, where Miro was intended for (in our case). This was visible because we grouped costs by departments and measured each function's metrics individually.

2. Departmentalisation of expenses helps you track metrics and leverage the data to make better business decisions

Going back to the good old starter - startups are low on resources and optimising for growth is the strategy to get it right. Most startups rely on the founders’ gut for running the business. It’s not wrong - in my opinion, an experienced instinct is perfectly fine!

Optimisation of costs needs data. When you departmentalise costs and track metrics at a unit level, you make numbers speak to you. They will tell you what needs to be done, what needs immediate attention, and how you can achieve your goals.

3. Departmentalisation of expenses can help you benchmark against industry standards

I always wondered why it mattered if we were earning more than the industry average or spending more on ads than our peers. Turns out it matters. Industry benchmarks are well-researched numbers that paint a picture of the industry. Grouping costs by departments not only helps you compare against benchmarks but also highlights your core competencies in the best light.

As a startup, such benchmarks are truly important and help you optimise resources for success.

How to departmentalise costs?

There are a few ways you can accomplish this -

1. Asking your accountant - time-consuming and expensive

2. Manually managing it - time-consuming and if you lack experience, you could mess it up

3. Using software - (like Pry) automated with a fixed fee (not sponsored)

Departmentalising costs

Regardless of the approach, you should try to at least group by broad categories such as Sales and Marketing (S&M), Research and Development (R&D), Cost of Goods Sold (COGS), etc.

Using tools like Obsidian can then help you track costs and metrics at a unit level. Remember, you can’t measure something if you don’t track it. Measure profitability at the unit level with Obsidian.