How to Turn Your Costs in to Investments

[Ian Corner]

Is Your Business Making Smart Decisions?

Every penny you spend in your business matters – whether for managing your immediate cashflow or to guarantee your longer-term success. Incurring costs within your business is unavoidable, and in actual fact should be seen as a sign that things are going well. The mistake made by many businesses is to assume that all spending is bad and to look to minimise it in any way possible, but this is damaging. The trick is actually to make sure that everything you spend can be viewed as an ‘investment’ and not simply a ‘cost’.

This is not an investment in the traditional sense of something solely purchased for a return on your capital, this is a state of mind whereby you maximise the benefit that your business receives from every expense. Under this approach, it is not simply the cost of the cost that matters – it’s everything. By moving away from an old one-track approach of prioritising cost-minimisation above everything, you open up a world of opportunities within your existing cost base and operations. This might actually point you to a slightly higher cost solution, but if it is delivering multiple benefits then it is the right decision.

This is possible in just about every category of spend – you just need to be mindful of the opportunity, constantly monitor the options, and be open to a bit of innovative thinking. It may be harder work to consider a full list of qualitative as well as quantitative factors, but the benefit to your business will be substantial. If you have to incur a cost, why not get as much benefit from it as you can?

What More Is There Than The Size Of The Cost?

For a lot of businesses, this represents a significant change in thinking. The questions below can help you get your head around some of the concepts involved and start you thinking about the practical application in your own business:

• Could this spend deliver cost benefits over the longer-term rather than being the cheapest short-term solution?
• Could this spend deliver revenue benefits?
• Could this spend deliver qualitative benefits, such as employee wellbeing?
• Could this spend deliver something to the local community, or wider society in general?
• Could the spend support your overall culture or reasons for being in business?
• Could this spend improve on what you have today?
• Could this spend be a stepping stone to something else, either in this cost item or elsewhere?
• Could this spend open up alternative possibilities in other areas of the business?
• Could this spend offer the potential of mutual benefits, cumulative gains, or the ability to kill two birds with one stone?
• Is this spend a temporary arrangement or something more onerous?
• Is this spend part of an important business relationship?
• Does this spend match your current priorities?
• Could this spend involve something innovative rather than a traditional commoditised purchase?

With those concepts in mind, let’s look at just a few specific examples:

1.  Direct Material Costs

This is a good place to start, as there is a decent chance that it is an area where you currently consider something in addition to cost – namely, the quality of the materials going in to your product or service. How can you take the concept further and really make this cost work for your business?

Firstly, make sure that the quality of the materials sends the right message to your customers and differentiates you from the competition. The right materials can make your product stand out and be memorable and this will pay dividends in repeat custom and positive feedback.

Secondly, the quality of the materials should be such that you minimise waste in the production process, and minimise finished product being returned with defects. It is vital to factor in the costs of wastage, returned goods, negative publicity, and lost productivity in to the spend decision in this area.

Consider also the properties of the materials themselves. Could you invest in lighter materials in order to save money on distribution costs? Could you invest in materials that are fully recycled/recyclable in order to support your environmental objectives at the same time as reducing overall waste in your process?

Finally, consider where you source the materials from. Investing in local supply, even if smaller scale and therefore more expensive, can reap benefits in the form of cheaper inbound freight costs, greater flexibility in supply, increased local brand awareness, and a smaller carbon footprint. Similarly, sourcing products from sustainable or fair-trade sources will help you to achieve your community aims and give you another way to raise awareness of your brand.

2.  Direct Employment Costs

Rather than seeing your costs increase in this area as a result of general wage inflation, the benefits of proactively paying more than the market rate can be significant.

When deciding on your pay strategy, you should keep in mind that paying more than the competition will widen the pool of talent available to you, and – provided you also invest in your recruitment process – allow you to select people who are more highly skilled, motivated, and productive. Having the right people in your business will enhance productivity throughout, it will benefit your culture, it will boost your reputation as an employer, and it will make future recruitment and staff retention that much easier.

Also key to focus on here are the amounts you spend on the tools and environment for those people. Again, spending more than the minimum on tools to optimise shift patterns and better match supply and demand in your business will boost productivity and minimise the need for unexpected overtime or short-term recruitment. Investing in regular training will just reinforce everything we have talked about here – motivated and productive people helping your business to thrive, and being priceless brand ambassadors in to the bargain.

3.  Distribution Costs

Distribution costs is a classic example of an expense line that can easily go under your radar – simply assumed to be an unavoidable cost of doing business that you shouldn’t pay too much attention to. Think more deeply, though, and it is another potential source of competitive advantage if you spend wisely.

Invest in a distributor with high levels of reliability to minimise stock-outs and product damage at each stage of the supply chain. Not only does this cost you money to rectify, and impact your revenue, but it damages your reputation every time it happens.

Just as important is to use a distributor with the right level of flexibility, such that you can manage your production times efficiently and keep your inventory levels and working capital under control at all times.

Finally, consider the green side of this decision. Consider a distribution strategy that not only minimises your environmental impact today, but has a plan for how to continuously improve in the future.

4.  Insurance

Surely, insurance is insurance? Make sure you are covered where you need to be covered and find the cheapest quote via a comparison service or broker?

As we’ve seen in the other examples, it’s not that simple. Broadening your decision criteria – even in an area such as insurance – can help you drive multiple benefits from the same spend.

Start by getting your house in order. Identify and prioritise all the risks to your business, and then work out all the measures that you can take in-house to mitigate those risks. Once you have accomplished this, see your insurance cover as an opportunity to introduce some control over your problem areas and give you some peace of mind – and with it the chance to focus on running your business. In order to achieve this, you need to ensure that the cover you have in place is around your biggest risks and is designed to fit your needs perfectly.

Arguably in insurance more than anything, you need a provider that you can trust – as you are likely to need their help at particularly stressful times. Invest in a relationship that means you can actually benefit from the insurance should the need ever arise.

In addition to an insurance broker that you can trust, why not consider one that can also help you stand out from the crowd? Using someone such as Unity Insurance Services, for example - which is a wholly owned subsidiary of The Scout Association – can help to deliver on your corporate social responsibility goals. In the spirit of trying to make all of your expense items work twice as hard, using a broker where the funds are ultimately returned to help young people learn skills for life has to be a win-win.

5.  Accountants Fees

I’ve left the easiest one until last.

Given that there are certain legal requirements that you have to comply with, whether to Companies House or HMRC, it is highly likely that you will contract with an accountant at some point. Since you will be paying an accountant anyway, the trick is to make sure you benefit from one that is both an accountant and a business advisor – what we would term a finance partner for your business.

Make sure you use an accountant with a wealth of experience that they can bring to your business and act as a sounding board for your trickier decisions. Someone with the ability to explain complex concepts easily to make sure that you understand your business from every angle.

There is a huge amount of data in your business and if you choose the right accountant, you can benefit from the work that will be undertaken to gain unique insight and see new opportunities at the same time as fulfilling your statutory requirements.

In short, use Corner Finance and your accountancy spend will become one of the best investments you ever make.

Think Wider

If you can adopt this approach to your cost base – adjust your thinking, review everything, constantly monitor and refine your decisions - then you’ll soon start to reap the rewards. It will help you to focus on the long-term future of your business and to break out of the cycle of short-term cost reduction. Keep an eye on the horizon. Think tomorrow, think wider.

For a full list of cost items and suggestions for how you can adopt an investment attitude, email us at [e-mail].

Alternatively, why not speak to me about a well-rounded approach to spending decisions and smart P&L management.