Expenses and Expensiveness – Understand how to correctly optimize business expenditure.
A client once asked me to assist with a presentation on the long-term effect of cutting expenses. The purpose was to raise awareness with managers on the impact scrutinizing expenses has on a business, using a few examples:
- A monthly expense of R10,000 is equal to a capital value of R800,000 on 15% yield p.a.
One phone call to your insurance house can equal a saving of R180,000 in 10 years (Getting your monthly bill from R10k to R8.5k).
Changing to the right type of bank billing structure can save three times the cost (Fixed vs per transaction billing).
While this is a good mindset to have, it is impact is negligible to what can be achieved by focusing on what is really expensive...
What is really expensive?
- Being penny wise, pound foolish.
- While you can pride yourself in cutting 20% off the cookie budget, you are overlooking and mismanaging the “pounds”.
- Staff costs are commonly the biggest expense in companies (Plus welfare, uniforms, insurance, personal equipment, etc).
Compare a business to a person’s physical and mental wellbeing. It can be obese, or it can be in top form. Depressed or cheerful. If a business wants to get in top form, it should cut fat AND build muscle (Not cut muscle and keep fat!). It must eradicate a toxic work culture and build a positive company culture.
15 things that are really expensive:
-
Poor management and treatment of employees
Negative employees are not looking out for your interests. They are not treating clients/customers correctly. A negative employee makes other employees negative. Staff turn-over is expensive.
An increased cookie budget is not the fix.
Treat your employees like you would like to be treated. Empower them while also keeping them accountable. Trust them. Support them. Protect them. Have their backs. Appreciate them. Lead them.
-
Poor management and treatment of suppliers, contractors and customers
Do you want them to look out for your interests? To reciprocate fairness and support?
Harboring good relationships is often at the cost of the most optimal expenditure. The saving is intangible but will deliver inexhaustible returns. A longer-term vision is required to understand this.
-
Impulsive decisions
Never make a big decision in a single day. Consult and give time. These decisions often look good in the moment but takes enormous costs reverse. Examples are large equipment purchases, recruiting new employees, long-term service agreements and changes in management structures.
Impulsive decisions result in obsolete services and employees.
Where unsure, rather opt for independent contractors, temporary services or rentals. The tap can be closed very quickly. Rather keep a lean structure for as long as possible.
-
Cutting on maintenance and preventative measures
Four years ago, Eskom managed to obtain zero-load shedding for a long period of time (despite its failing and old infrastructure). Today they sit with the worst load shedding and financial problems in their history, despite being under credible management.
Why?
Management at that time incentivized plant managers with bonusses if they succeed in obtaining no load shedding. They however failed to enforce the necessary measures to ensure that these managers maintain their plants. Maintenance was skipped to ensure they reach quotas (See more here).
This is only evident today.
-
Cutting strategic expenses
Cutting muscle instead of fat. Reducing your marketing budget will impact your sales. Underspending on staff motivation will show its effects down the line.
Often spending more is cheaper.
-
Being afraid to confront
A manager often sits in a position where an employee/service provider is underperforming. This is unattended and ignored, afraid to confront. Afraid of the possible repercussions.
This creates a toxic work culture. This is expensive.
-
Not sticking to your core focus
It may look lucrative for a company to add a product, service or client that is outside their core business.
Not being able to acknowledge and understand your limitations and core focus is expensive.
You might soon end up being a construction company with a refuse removal and maintenance team, while running a tuck-shop and hardware store from its offices.
-
Doing unnecessary tasks
This often happens with a change in management. Duties performed continue without question but is obsolete and not bringing any value.
This is expensive. This time could have been used on meaningful tasks. Rather let an employee take off than doing meaningless work.
-
Biting off bigger chunks than you can swallow
Keen on implementing a new system that will impact the whole business? This should have a thorough study done before being implemented. Only proceed if it proves that it can make work simpler. Often complicated systems remain poorly implemented, causing a lot of frustration and negativity – not providing the desired result and ending up unused.
-
Not delegating
A highly skilled manager easily becomes a big bottleneck. He burns out while others sit idly by.
A good mindset to have is “how can I work myself out of this job in one year’s time”.
Really. Think about it. You’ll always have enough to do.
People often cling to their jobs or want things to be 100% perfect (hence no-one is good enough to assist).
Defining work, delegating and settling for 80% of the result is required for successful delegation (Note the 80/20 rule).
-
Not having discretionary time
“We’re often so busy cutting through the undergrowth we don’t even realize we’re in the wrong jungle” – Stephen R Covey.
Without discretionary time – being able to take a step back and have a birds-eye view – you might just be efficiently cutting down the wrong jungle.
“We must never become too busy sawing to take time to sharpen the saw” – Stephen R Covey.
“Management is doing things right; leadership is doing the right things” – Peter Drucker.
-
Not using the right tool for the job
A typical mindset is “why not just buy plyers, instead of plyers, a hammer and a screwdriver. It is much cheaper!”
Or not, but you get the point.
You can’t use plyers to drive in a nail (You can, but apart from a lot of frustration, your plyers won’t last – as with the employee instructed with the task). The same goes for the use of software, machines and equipment and even employees.
-
Ignoring compliance
While it may seem burdensome and unnecessary – especially for small businesses – prevention is better than the costs and trouble that follows by not complying.
At least understand what you choose to ignore. What the likelihood and consequences are.
(See here more on the basics to have in place when starting a business)
-
Buying cheap
Do you want to spend your time growing a business, or fixing problems? While it is part of business to fix problems, at least make sure they are as few as possible.
If the intention is to keep something long, buy something that will last.
-
Poor procurement controls
A good procurement system is one that is easy to use while providing the minimum needed controls to ensure wise expenditure.
No controls are expensive. Too much controls are expensive.
