by Jeremy Lowe
When the economy doesn’t cooperate with our business plan, or when the weather doesn’t follow the predicted forecast and our businesses suffer, we can point the finger with certainty at the villain.
Perceptive business owners may even recognize management problems that rob their companies of hard-earned profits. Yet, there’s a subtle thief that may be stealing profits from right under your nose.
This gremlin is known as your soft costs: business expenses that aren’t accountable directly on a profit and loss (P&L) statement. They reduce profitability and are hard to control.
Although you may categorize end expenses properly on a P&L statement, their root cause may be linked to another part of your business. This reduces your ability to pinpoint and control the originating expense and thus, maximize your profits.
Controlling Soft Costs
To become adept at finding hidden costs in our businesses, let’s examine a couple of scenarios to see if we can find costs not normally considered as part of our decision making process.
Scenario 1: Years ago, a copier salesman installed an infrared counter in a copier room, allowing me to measure the number of times employees entered to create copies.
Originally, we could measure the amount of copies made, but not the trips made from desk to copier room. This simple device opened my eyes to a soft cost of wasted time by employees leaving their desks to copy forms they used numerous times each week.
The salesman then provided us with a networked copier that the staff could operate from their desks as a printer/copier. As a result, the number of trips to the copier room dropped by 50%.
If my staff didn’t have to leave their desks as often, it made perfect sense to me that the new copier would provide an economic payback in labor and productivity. Thus was my introduction into the world of soft costs and their control.
Scenario 2: Another means of soft cost control is uniformity. For instance, some contractors require all prospective technicans to own certain tools before they can be hired. The reason: required tools control the soft costs of labor.
How so? By requiring that technicians have certain tools and are proficient in their use, these contractors can ensure that service is performed at the highest level of productivity.
For example, a certain leak detector may be required because of its high rate of detection. This device enables the technician to complete the service call in the time allowed.
However, if the technician brings a detector that’s slower or has an unknown detection rate, it may take longer than estimated on a repair call. Time is money.
Productivity isn’t always directly measurable on a P&L statement with a line item that says “Technician Tool Impact.” Therefore, we must learn to gauge these costs by using logic and experience so they’re taken into account when looking at the bottom line of profitability.
Spend Money to Make Money
Let’s say that Do-Re-Mi Contracting wants to improve profitability by lowering overhead. As they examine their P&L to determine where savings can be found, an observant employee suggests they create a long-term program to help the dispatcher, service manager, and service technicians to better cope with job-related stress during peak summer and winter months.
Now, this program could at first be seen as costly. However, Do-Re-Mi Contracting does a careful study and finds that true soft costs savings may be found by helping their employees lower stress. Stess management would reduce employee turnover due to burnout during peak seasons, reduce sick or missed days, and increase productivity due to better cognitive ability. There would also be less job-related accidents and errors, and better employee morale, all adding up to savings.
Whether or not each of these items can be quantified with an actual dollar amount on a P&L statement isn’t critical at this point.
Instead, the company believes if employees consistently show up for work and like their jobs, the business will be more successful. Furthermore, if they better cope with stress, they’ll make better decisions, which, in turn, may make better financial sense for the company.
It’s important that company management recognize the potential long-term savings or loss as a whole and determine if one outweighs the other.
In this case, Do-Re-Mi Contracting realizes that stress management training will cost money. However, in the long run, it has the potential to save them a larger amount of money in many areas of the company. As a result, they implement the program with great success.
Measuring soft costs is both an art and science. While it may sound like trying to catch the wind, soft costs can be determined through careful study. Here are some ideas:
- Group project — If your company is considering implementing a major change of some kind, gather a group of people from your organization from different departments. Sometimes, an outsider looking in provides us a much-needed objective view.
Invite them to anticipate the costs of operation, and potential profits or loss from the change. Don’t limit this focus group to the department affected; let it be company wide, or even expand it to your circle of influence outside the company for a fresh perspective.
- Pros and Cons — Draw a line down the center of a sheet of paper and list all the pros and cons of the change, no matter how trivial. Highlight sections with cost or profit potential so that you can closely examine these items. Then, show this pro and con analysis to the group examining the change.
- Step-by-step — If you’re contemplating a tangible change such as software or a procedure, have the affected employees write a step-by-step procedure for their current process. Then, compare it to what the new procedure would involve.
Would any steps be eliminated, saving time? Would any steps have to be duplicated? Do the affected employees see a savings of either time or money for their department?
An additional soft cost that many business owners and managers fail to account for is the cost of not implementing a business strategy in a timely manner.
Many contractors realize that much can be learned from seminars, classes, trade shows, and programs such as HVAC Comfortech. When a contractor finds a business strategy that’s a successful match for his or her company, the program should be put in place as soon as possible. The longer the process of implementation, the greater the soft costs involved.
Another, if not the greatest, soft cost that contractors fail to properly measure and respond to is the driving desire to “do it yourself.”
Let’s look at flat rate pricing as an example. Most contractors who perform service work could create their own flat rate pricing system, and keep it updated with parts costs and prices and build/repair scenarios.
The question is why waste valuable staff time that could be used more productively in other facets of the business? After all, contractors could also build their own service trucks, but there’s a diminishing return on the investment of time and resources.
If you’re in the business to do service, then wear that hat and spend your time concentrating on improving productivity and profitability in this area, not on becoming a publisher of pricing guides. The costs associated with doing this internally must be considered. When weighed against the costs of having flat rate pricing guides produced outside, you’ll often find that internal production has no real savings.
In summary, take the time to analyze all business decisions for obvious costs and profits that can be seen in your organization’s P&L statements. Then, look beyond the paper side of running an organization and learn to examine the long-term financial implications for every business decision you make.
Jeremy Lowe handles sales and training for Callahan/Roach Products & Publications Ltd. A former manager of a $9 million HVAC contracting firm in Florida, Lowe can be reached at 800/738-7017 or [email protected].