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Evaluating Proposals

What step costs are

One of the CFO’s key roles is to evaluate proposals that involve incremental fixed costs, otherwise known as step costs. As a manager, you may find yourself presenting such proposals.

Having a CFO perspective can help you to get the approval you need, or at least avoid wasting time on proposals that have no chance of success. Step costs are fixed costs that remain constant for a certain level of business activity but change once business activities cross that level.

Reviewing step cost proposals

The CFO is always proactively managing the company’s finances. A part of this financial management is to review step cost proposals closely. Step costs may affect the company’s overall profitability, so the decision whether to undertake a step cost can be crucial to business success.

You first need to be clear about what the cost of this additional overhead will be. You also need to find out what additional sales will be required to cover the additional costs. Another factor to consider is what the maximum production or sales capacity of the organization is. Finally, you need to consider the stability of additional sales — where they’ll come from, what’s involved, and how the business will be affected.