Lee Rust, Owner, Florida Corporate Finance
I know several attorneys who believe that the United States Postal Service has been eliminated and replaced by FedEx. For even the most mundane items, they send them by FedEx at ten times the cost of postage stamps. Make sure such attorneys aren’t spending your money on those deliveries.
You work hard to generate your company’s profits; don’t throw any of those profits away with corporate waste. After all, the elimination of one dollar of waste results in a dollar’s increase in profits, and it’s often much easier to stop corporate waste than to increase prices or reduce other operating costs.
As you review your monthly financial statements, look for expenses or line items that might be hiding unnecessary costs. In particular, examine the following for corporate waste:
■ Advertising, including your use of the Yellow Pages – Many companies continue to use media advertising that has become either nonproductive or inappropriate. Ask yourself who among your prospective clients will actually see your ads and react to them. If the Yellow Pages are effective for your type of business, fine, but determine what minimum size ad will give you the greatest return on your investment. I’ve had too many clients who believed that higher advertising dollars would solve sales problems; they seldom do. Although marketing can be an effective sales aid, it is seldom the solution to anemic revenues.
■ Your corporate membership in the Chamber of Commerce - What does that really give your company other than a small plaque to put on the wall and high salaries for Chamber employees who do little other than solicit other members to pay more fees? In 2006, the head of the Chamber had a salary of just over $2.1 million which was 1.6 percent of all Chamber revenues.
■ Cell phones - Do you really need as many as your company has? Which employees need them and which don’t? And how might you reduce your mobile phone costs with a review of your total plan and the types of phones you supply to your employees?
■ Of course, travel and meals are always areas where waste may occur and be relatively easy to reduce.
■ Penalties should not be a line item on your income statement. If it is, determine what penalties are being paid and why. There should be none.
■ Although bad debts are an expense for most businesses, you should calculate their relationship to revenues and their trend over time. It may be impossible to eliminate your bad debt expense but, if it is high, you may have either credit approval or collection problems. Find out which and correct it. Set maximum bad debt goals and see that others in your company understand the costs
associated with giving away your products or services for free to customers who can’t or won’t pay.
■ Another cost that should be carefully monitored is warranty expense. If it’s high, you have a problem with either quality control or your warranty procedures. I recently had a client devoting just over two percent of revenues to warranty expense, the highest of all that company’s G&A Expenses other than salaries. Reducing that single item to less than 0.5 percent of sales increased profits by
over 50 percent. It also resulted in production improvements that increased customer satisfaction.
■ If your company manufactures a product, you should also develop a method of calculating scrap production in relation to the quantity of goods manufactured and then examine scrap trends over time. Scrap is material you buy and then throw away. The less you throw away, the higher your production efficiencies and your profits.
■ Not all companies have the financial strength to take advantage of early payment discounts. If you can, do it. Seek suppliers who offer such discounts or ask those who don’t if they will. If you can’t take the discounts offered, determine what you need to do to change that. After all, a one percent discount for a ten-day payment is equivalent to a 36 percent annual return. Increasing your bank credit line to cover discounted invoices is a quick way of getting that return.
About 35 years ago, I managed a brick manufacturing facility in a turn-around effort. Each week, I had a foremen’s meeting to discuss operating problems and solutions. Prior to one of those, I spread $10 of nickels on the floor. Back then, of course, a nickel had much higher value than today. As the foremen arrived for the meeting, they noticed the nickels and began to pick them up. By the time the meeting started, all the nickels were gone.
That was a great lesson. Bricks, I explained, cost about a nickel apiece, but when one falls off a pallet or otherwise ends up in the yard, few if any of the workers pick them up. “You picked up the nickels,” I said, “why don’t you pick up the bricks.” As a result of that simple example of corporate waste, our yard was cleaner and our otherwise scrap bricks were turned into money.
Waste is an insidious expense that gets you nothing but erodes profits dollar for dollar. In addition to increasing profits by reducing waste, monitoring corporate waste is an excellent method of identifying seemingly unrelated problems in a number of different operating functions. Wherever possible, eliminate corporate waste in specific expense categories but also determine ways of monitoring the level or extent of waste and then track those expenses and trends. Costs will go down, and profits will go up.
Lee Rust, owner of Florida Corporate Finance, specializes in Mergers & Acquisitions, Corporate Sales, Strategic Planning, Financing and Operations Audits. He can be reached by phone at 407-841-5676 or by email at hleerust@att.net.
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