STRAIGHT TALK No 1
Monday 21 August 2017
Don't cut cost - cut waste
The beneficial impact of cutting waste
The basic requirement of a Director is to cause sales to occur; meet expenses while doing so, pay tax on the net result and send the remainder off to the shareholders.
This simple model captures all the activity involved in your business. More often than not the profit outcome is related to the quantity of good decisions that were made over the bad ones. Each decision has a cost to it and that cost will either enhance profit potential or contribute to loss. Business is a combination of process and decisions around that process.
Decisions and the costs of them are not the problem. It’s those parts of the business where no deliberate decisions are being made that cause the surpluses to be soaked up. Endeavour is the essence of a living company striving to be wealthy – don’t cut that activity but consider how you can cut down waste while you are doing it.
Think hard about this! If your business operates on 40% gross profit and you cut 2% from your cost of sales and 2% from your expenses each quarter, your net income will double in one year without any increase in sales.
The ratio between total costs and total sales is a vital metric to be observed. All costs tie to decisions made. Some will be of immediate consequence and some will be for the long term (leasehold interest for example). It is not those decisions that should concern you though. Rather it is the decisions that are not being made about cutting waste.
Commercial efficiency is based in the notion that the business should be constantly striving to spend only the actual cost involved in doing the job. But of course that happens much less than what any Manager would like. Consider the time where you have assessed labour to undertake a project only to find sloppy work practices result in call backs and do-overs. What about the workshop lights that are left on when not needed or driving back and forth when a tiny dollop of forethought will have saved both time and operating expense?
The reality is that there is significant waste in every business. If waste minimisation became a focus of the business then profits have the potential to increase enormously.
Take a look at the table below and the graph that follows. Assuming a gross profit of 40%, waste elimination at a rate of 2% per quarter from Cost of Sales and Operating expenses will result in a doubling of profits in that year without any upward movement in sales.
Compound savings are not available for the long term nor will they be available for the well-run process business. That business will find it difficult to decrease cost of sales by much at all. The most significant benefit will fall to the business that needs a shake-up as to how it thinks about its operations and how it manages its cost curve.
Make a mission with an objective and circulate your intention across all members of the organisation. Some of the rewards should go back as staff rewards in recognition of outcomes achieved and it shouldn’t be too long before the changes made will become standard practice and the culture of the business.
My three tips for achieving this result are
1. You are the Boss and it is your job to achieve the most with the least cost. Be the Boss and direct resources in a way that minimises waste.
2. Make deliberate decisions about costs to be incurred and get the detail you require before incurring that spend.
3. Clean up. A tidy organisation makes for ease of movement of both the business and the people that are a part of it. Mess and disarray are great places for waste to hide.
The purpose of being in business is for the creation of wealth. Anything that can be done to finesse that objective will increase profits and advance the fundamental purpose of the enterprise. Waste is destructive, causes mobility friction and damages the potential of the enterprise to flourish and prosper.
Bryan Williams – on a mission to save businesses