By George Scott
Maximizing profitability is the primary objective of all business owners. There is a two-pronged approach to achieving that objective—proper pricing and reducing expenses. This article focuses on reducing expenses. My intention is to provide you with food for thought about possible aspects of your business where savings may be realized.
Increase Compensation. To a degree, this is an example of “you get what you pay for.” This particularly holds true for businesses that need skilled laborers. Think about it. If your business has some pipe leakage, would you want a plumbing firm sending only an apprentice plumber who is willing to settle for minimum wage to fix the problem? Or would you prefer the firm sends a plumber who has years of experience, possibly a master plumber, for which the fee will be higher?
Over 100 years ago, Henry Ford took this approach to attract the best workers when he doubled his employees’ pay and shortened the workday to the current eight-hour standard. Obviously, I’m not recommending doubling payroll expenses. What I am recommending is that you take a good look at what you are paying your employees, compare that amount to industry standards, determine if the compensation is fair and reasonable and make adjustments that make sense for your business.
Reduce Vendor Costs. The prices your vendors are charging you for their respective products or services may be hurting you…or they may be helping you. It all depends on the level of your proactive management of those supplier relationships.
Regardless of your relationship length with key vendors, every few years it’s always helpful to secure three to five bids from different suppliers. Comparing those bids will let you know if your current suppliers have been taking you for granted or have been treating you fairly.
Another approach to reducing the cost of raw materials (if applicable), general supplies and even your medical insurance coverage is to join a purchasing consortium either through an industry association or a business association like the Small Business Association of Michigan (SBAM). With that said, it is worth giving the coverage available through SBAM a second look.
Develop Operational Efficiencies
Production. At some point in time, every company with line production (for either short or long product life cycle items) has experienced a costly bottleneck. A mismanaged or unmanaged bottleneck can lead to frustrated employees, higher per-unit production costs due to lower overall productivity, angry customers (who start doing business with a competitor), lower revenues, suppressed cash flow…you get the idea.
What should you do? First, determine where the bottleneck actually exists, not necessarily where you think it exists. For example, a machine operator may be blamed for being slow. The reality may be that there is nothing wrong with the operator. The reality is that the 30-year old machine is operating at maximum capacity and needs to be replaced with a newer, higher capacity and more efficient model.
Administrative. Does your office staff need to crank the phone before they can make a call? If so, it might be time to get a new phone system. Although the administrative part of your business is probably not that much out of date, sit back and think about the administrative techniques and procedures you have been using for the last 10 or 20 years. Yes, the job may be getting done. But how much faster could it be done?
The value of updating recently occurred at a mid-Michigan business. A highly capable and very knowledgeable key staff member retired after 20 years of service. Upon assuming the position, the new employee took stock of historical procedures, software programs and general overall approach. That individual’s fresh, common sense perspective led to researching new software options (then selecting the best fitting program), modernizing and simplifying processes and using a laser-focused diligence to task completion. The end result? Roughly 1,700 work hours have been saved in the first year!
Use Marketing Dollars Wisely. Are you using some form of advertising and/or public relations to attract new customers/clients? If so, how are you measuring those efforts’ Return on Investment (ROI)? What types of ads are you running? In what media are they placed? Do you sell your products and services to consumers or to other businesses? Can you quickly describe your ideal customer/client? What is your trade area?
Precise, introspective answers to these questions, mixed with a good dose of common sense, will provide insights that help optimize the effectiveness of each marketing dollar spent. For example, assume your trade area is composed of all significant population centers south of the Mackinac Bridge. A well-planned (and properly financed) expansive TV ad campaign may make sense. Conversely, if your trade area is six counties, then a vetted direct mail campaign and local publication ads may be the most cost-effective approach.
These comments are based on two assumptions: 1) the price for your product or service is competitive and you realize an acceptable per-unit profitability; and 2) product/service quality and customer service meet or exceed customer expectations.
Minimize Rejects and Returns
Tracking your production rejects and your customer returns can help you target the cause, correct it and substantially reduce (ideally, eliminate) these two very costly situations.
Production Rejects. It is better to catch a badly made item before it leaves your production facility. For example, if a few batches have an unacceptable level of rejects and the source is determined to be from one individual operating a particular piece of equipment, then it’s easy to point a finger at that individual—without determining the real underlying cause. That approach is unfair and counterproductive. The individual may not be directly at fault.
Therefore, the wisest approach is to determine the real cause, which can be determined by asking a few questions:
Is the piece of machinery malfunctioning? Has its maintenance schedule been adhered to?
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How is the individual’s attitude? Does that person accept responsibility, but just does not understand why the numbers are off?
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If the individual’s attitude is acceptable, then is the individual experiencing a physiological or psychological change?
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If that is the case, is there something about the production process that can be changed to prevent the individual’s physiological/psychological change from recurring or worsening? A medical professional’s opinion can be helpful in managing questions #3 and #4.
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If that individual’s attitude has deteriorated, do your best to determine why. Life factors such as the illness of the employee or a loved one, marital discord, financial pressures or any one of a number of psychosocial stressors could be the root cause. In this instance, applying the recommendations found in Daniel Goleman’s book Working with Emotional Intelligence can help save the expense of hiring a replacement.
Nevertheless, if the individual’s attitude has soured for no apparent reason, and the employee’s continued presence has created a toxic environment for other employees, then replacing that individual may be the most efficient way of returning to a low-reject production situation.
Customer returns. If a single customer returns an item or complains about a service, then that customer just might be fickle and can never be pleased. However, if the same or similar type of reason for a return recurs frequently, then it’s necessary to look internally for the cause (see the previous Production Rejects section).
The issues listed above are just a few ways in which your expenses can be reduced. From time to time, it may be necessary to secure an objective outside professional opinion about reducing your costs. Your accountant is often the first person you can, or should, turn to. There are other professionals with varying categories and depths of expertise who can provide just the perspective and guidance you need. The Service Core of Retired Executives (SCORE) is another source of needed and insightful guidance and can be found at: https://www.score.org.
Someone once said, “You never go out of business. You just run out of money.” Thus, logical and responsible expense reduction (wherever possible) increases your chances of long-term survival.
George Scott is the President of Business Consulting Services, an East Lansing based business consulting and business brokerage firm that helps business owners fix, grow or sell their businesses. He served on SBAM’s Strategic Communications Advisory Committee and currently serves on SBAM’s Entrepreneurial Task Force. George can be reached at 517-515-1701 or georgescott@businessconsultingsvcs.com.