Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Cost-containment is very different from cost-cutting. Cost-containment involves controlling increases in costs before they occur. It’s a way of limiting future risk.
Cost-cutting, on the other hand, is what happens in the absence of cost-containment. It forces business owners into a position of saving money after the fact. Sometimes, it’s necessary as a short-term solution; however, businesses cannot operate on a long-term basis in cost-cutting mode. Therefore, it’s critical for business owners to have a day-to-day, ongoing mentality of cost-containment.
Cost-containment strategies can be applied to small companies just as easily as large companies because they involve the same two groups of people: employees and vendors.
To contain costs, business owners must involve employees. Without their input, money will continue slipping through the cracks in the form of waste, inefficient systems and areas of weakness. Most business owners are aware of these issues on a global basis, but they aren’t next to them every day like their employees.
Business owners need to ask how and where waste occurs. Even more important, they need to provide incentives for employees to develop solutions.
A good strategy to implement is a savings-sharing plan. It isn’t complicated or expensive and can be put into place rather quickly by just about any company. Start by putting together a quick form for employees to fill out, asking questions such as, “What do you think we waste? Where are we spending way too much money? How much do you think we’re overpaying?”
Then ask, “What are your ideas for containing these costs? How do you think we could measure the savings?”
Forward the responses to a small review committee in the company. If the committee approves an idea, then it should be reviewed by the accounting department to confirm that it can, in fact, be measured without incurring additional costs. If the idea passes both tests, give it a shot for a year – and give the employee 20 percent of the savings.
A tooling company recently implemented a savings-sharing plan, and soon after, implemented an idea that helped curb rising tool costs.
The number of missing tools had become a major problem and the cost of replacing them was high. An employee suggested embossing the company’s name on each tool to reduce the number ‘missing’ from the shop. It was a simple solution, but it worked. Not only did the company’s expenses go down drastically, but the employee was able to share in the savings generated by the idea.
For the same reason, Holiday Inn puts a big, green stripe across their towels. The cost of replacing the towels that guests were taking home was high. The hotel giant could have simply slashed their costs by switching to a cheaper material, but it chose to contain those costs instead. The quality of the towel wasn’t compromised, and people think twice before bringing one to the beach.
Of course, not every idea will work, but one or two a year is better than none at all. Regardless of whether an idea is ‘good,’ be sure to thank every employee who fills out the form with a small token of appreciation, such as a $10 gift card.
It’s also important to involve employees when hiring. Four departments may be overtaxed at the same time and make a compelling case for additional staff. But before adding four new people, hold an interdepartmental meeting to determine exactly how much help each department needs. In reality, the company may only need to hire the equivalent of two people who have interdepartmental duties.
Another good way to contain costs is by locking in prices with vendors. Rather than guess how oil prices and other factors will affect the company’s future costs, assume there will continue to be volatility and establish a stable pricing structure.
What is it that the company buys all the time? What will the company surely buy in the future? Identify the company’s largest vendors, and ask them if they’re willing to commit to a certain price structure over the next two or three years in exchange for continued business.
In an uncertain market, most vendors are happy to know they have a customer that’s committed to buying from them, and businesses are relieved to know they’re insulated against large price swings.
Big companies establish pricing structures all the time. McDonald’s has established forward purchasing contracts on its ground beef, for example. It’s not going to sit around and wait for the price of ground beef to triple; the consumer won’t go for that. McDonald’s knows it will be buying hamburger in the future, so it’s locking in prices now.
Small businesses can play the game just as effectively. If a company is currently paying $5 per yard of material, for example, it may work out a rate with its vendor of $5 this year, $5.25 next year, and $5.50 the third year, which is an inflation rate of about 5 percent.
Business owners can’t do much about radically swinging oil prices and inflation rates, but they can take action to control their own costs. If cost containment is done as a matter of course, cost cutting should not be necessary. And that’s a success for businesses, employees and vendors.
Charles Selcer,
Schechter Dokken Kanter:
612.332.5500
cs*****@****pa.com
www.sdkcpa.com
