Financial cost avoidance is the practice of performing activities that lead to prevention of unneeded, unwanted or incorrect spending. Identifying, tracking and reporting these savings offers perspective into the financial value of cost prevention activities. The question begging to be asked is, are cost avoidance dollars real? On one hand, the answer is unequivocally yes. Had preventative actions not been taken to identify and eliminate unneeded, unwanted or incorrect spending, those dollars would have been spent. Through identification and elimination, money is returned to the organization.
On the other hand, the answer to the question is maybe. While savings are created, the sustainability is open for interpretation. The value of savings over time may be viewed as having depleted financial value in the future. This argument underpins the question, how long should cost avoidance savings be tracked?
One school of thought suggests it should be forecasted for the calendar year in which the cost avoidance occurred. Another suggests carrying the savings forward for twelve months. A third suggests the savings are valid for the remainder of the contract term covering the related services. In each instance, a subjective decision is made to determine the financial value.
When determining the best duration methodology to adopt for reporting cost avoidance savings, consider the value your organization places on it. Some believe these savings have high value, while others view it with minimal value, as hard dollars are not returned to the budget over time.
In each scenario, tracking the savings against the fiscal year in which they are realized is a very logical approach. Independent of the method used, the leading financial argument for tracking remains that those dollars would have been spent had they not been identified and corrected.
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