Taming Your Expenses

About the Author:

In this article we discuss significant costs which can have a large impact on your bottom line.

Overheads

Many businesses are hurting due to Trademe and other Internet shopping options. Car yards, second-hand stores and many others retailers have been particularly badly hit. For many products, there is not much difference from a consumer point of view between a retail outlet and an online store whose overheads are relatively insignificant.

Overheads are the ongoing costs that are necessary to run a business and are not directly related to a product or service. They may be fixed monthly or may vary according to the volume of business activity and normally include expenses such as rent, administrative costs, telephone, power, interest, insurance...

A business that runs with the lowest overheads clearly has the competitive advantage. Billionaire Sam Walton, founder of Walmart, was one of the richest men in the world. He attributed his success to low overheads. The principle applies no-matter how big or small your business is.

At the other end of the spectrum, consider a husband and wife team, looking to set up a human resources (HR) support consultancy. They both have appropriate qualifications and good contacts from many years of working as employees in their respective fields. They have the promise of some immediate income from these contacts and this can help them become established. They consider two options:

Option 1:

Rent nice offices in a business area with a small training/meeting room and building signage to give them a visible presence. Pick up quality second-hand office furniture and computers on auction at an affordable price. When clients come to visit, they will be presented with an office that reflects an air of success, providing them with confidence that they are dealing with the right people.

Option 2:

Convert the study at home into an office for the business and plan to visit clients at their businesses rather than inviting clients to their office. The plan is that once the business grows, it can fund possible expansion into an office if this is needed. Training would either be provided at client premises or in facilities hired for the purpose. The cost of these facilities would be built into the cost of the training and therefore borne by the client.

Analysis:

It turns out that the monthly costs for Option 1 are close to $4,000 more than Option 2 due to extra costs for rent, telephone, power, insurance, security, cleaning and maintenance and so on…

In addition to the above, there would be the one-off costs of setting up office amounting to approximately $20,000 to cover legal expenses (lease), office design, layout, modification and décor, furniture, moving, signage, telephone system, and a launch to introduce potential clients to the new office. If this money were borrowed at the outset, then there would be monthly payments of interest and repayment of the loan.

This is significant for a small business starting out and can make the difference between whether the business is viable or not. If, as in this case, it is expected that having an office is not in itself likely to bring in sufficient business to cover the additional cost, then it makes sense to start small and have the business fund the growth into offices as the demand for services requires more staff to be brought on board.

Lessons on overheads

No matter whether you are a small or large business, you should be constantly looking at ways in which you can change the way in which you operate to bring down your overheads and give you a competitive advantage. Sure, you need to spend money to make money but try not to spend more than you have to, to achieve the desired result.

Some quick tips for bringing down overheads:

Review costs regularly (at least twice a year);
Focus on one cost at a time ( For example, see our free offer on Page 11 to slash your telephone bills);
For small costs that occur frequently, shop around;
For large costs, test the market periodically and negotiate with your suppliers, contractors and landlord;
Eliminate unnecessary spending (nice to have rather than need to have);
Reduce the cost of holding stock by decreasing stock levels and clearing out slow moving stock;
Consider different ways of doing business concentrating on efficiency and effectiveness (changing your marketing and other strategies, outsourcing...);
Do not be afraid to make the hard decisions. Cut staff costs by bringing down overtime and even reducing staff numbers;
Consider other alternatives to keeping wages down without affecting the quality of your team (see below);
You’ll be surprised at the savings you can achieve by paying less without affecting your business. However, be careful not to cut costs to the extent that it impacts on your service or income unless the savings are greater than that impact. E.g. Smart advertising during a slowdown often results in outselling rivals who cut back - more than compensating for the added cost.

Wages

For many businesses, wages comprise a significant proportion of their expenses. Whilst there is no prescriptive formula for setting and controlling wages there are certain procedures that should be adhered to.

Of course, it involves very traditional but necessary knowledge of such things such as how to recruit and train employees, how to set wages and salaries, and how to evaluate employees in order to provide feedback and help improve their performance. These skills and abilities are a part of the overall management process. Considerations when setting wages include:

Minimum wage legal requirement
Union requirements
Your employment agreement
Overtime
Competitor rates, conditions and incentives
Non-financial incentives

Wages means More Than Just Wages!

When referring to wages or salary it is important that you consider the Total Remuneration Package for that employee. Total remuneration will be made up of the following components

1. Base Salary

Hourly rate
Conditions adjustment
Service allowances
Skills or merit payments
Special allowances

2. Potential Benefits

Performance incentives
Commissions
Profit share
Share ownership

3. Fixed Benefits

Home telephone
Company car
Car allowance
Superannuation
Medical insurance
Death/disability cover
Professional association fees
Club subscriptions
Income protection insurance

But you will also need to be mindful of non-financial benefits which can be very attractive to some employees.

Non-Financial Incentives

It is important to remember that non-financial incentives such as flexible working, training, extra holidays and a good working atmosphere all have their place in rewarding employees. BUT it is generally a fact that cold hard cash is the main reason most staff come to work every morning.

For you to motivate your employees, you have to identify which approach to take: do you offer a financial or non-financial incentive? This will depend on what factors motivate the staff member but it may also be restricted by your company budget which cannot compensate for any wage increases or bonuses and therefore non-financial incentives have to be introduced. Poor pay may lead to staff being dissatisfied at work and therefore any non-financial incentives will not be effective for motivation. It is therefore important that you find the right balance between the two.

Non financial incentives may also include job enlargement (following through more of the process), job rotation and job enrichment (higher level of responsibility).

Irrespective of wage or salary, it is always a good policy to strive for maximising job satisfaction through other means.

It’s All a Matter of Balance

So, how do you balance paying your staff enough to keep them happy while not breaking the bank? What should you base your wages on? How to set wages is a tremendously complicated and interesting subject. My pay, for example. What should I get paid?

There’s my idea of what I’m worth. There’s the company’s idea of what I’m worth. There’s what some other company is willing to pay me. There’s what other companies pay persons similarly situated. Paying people properly is possibly management’s most difficult job. The most important thing is to set a policy. Once you have established a policy for your wages and salaries, everything else follows. For instance, you may decide that your market is exceedingly competitive and in order to remain financially competitive you cannot afford to pay high wages and will pay minimum wages only (supermarket for instance). Alternatively, you may decide to set your wage level in the general range of the top third good-paying companies in the community. Neither is right or wrong but each decision will have consequences.

For instance, if you decide to pitch your wages at the minimum wage level, then you are likely to experience a high staff turnover. Banks and other larger corporations have exceedingly prescriptive means by which remunerations should be set.

Many businesses employing professionals may consider discussing their opinions with their employee groups and try to get their consensus as to the best thing to do that will leave the business in a position to compete, and help it to get more business and steadier work.

So How to Compare?

There is a lot of information available to employers for a relatively low cost. Research is absolutely essential and this is being done for you by professional institutions such as IPENZ, NZICA, EMA and Chamber of Commerce. A number of HR based companies produce salary surveys although these are not very detailed.

Most of these show the lower quartile, median and upper quartile. As discussed earlier, you need to set a policy as to where you pitch your wages and this needs to be determined in conjunction with other potential incentives and non financial incentives.

How Do We Save Money On Wages?

In reality minimising your wages bill is a priority. Nevertheless, it is important to have a sense of social responsibility when setting wages to ensure that your employees are treated fairly. You will gain respect and loyalty as a result.

The ways to save money on wages and salaries are:

Whatever you do, be consistent and base salaries on qualifications, ability and results – not on how much you like the individual or because they are your cousin’s partner
Take all reasonable steps to stop staff replacements – this will cost you more in the short and long term
Provide other stimuli for your staff with non financial rewards and a culturally rewarding environment
Pitch your staff at the right level. Possibly 2 staff with level B qualifications can do the job of 3 staff with level A qualifications more proficiently and at a lower cost overall.

FBA Editor

Paul Wilton (editor)