Once you’ve made the decision to seriously grow your company, whether that’s through acquisition or other means, your largest challenge could be containing operating expenses. Even companies with formerly lean operating expenses find them skyrocketing under rapid growth. So, how do you keep the lid on?
First, to determine when expense escalation is a natural, unavoidable function of growth versus when those expenses are out of control, you absolutely must convert all variable operating expenses to cents-per-gallon reporting.
Don’t be bothered with that word “variable” if this is the first time you’ve heard it. That’s just an accounting term, which means that expenses are categorized into two types: fixed and variable. Fixed expenses do not change with volume changes. Items such as rent, property taxes, home office utilities, etc. are considered fixed expenses. All other costs are variable expenses because they increase as volume increases such as payroll, supplies, truck fuel, etc.
Begin by printing comparative income statements that will clearly show you the cost trends.
Next, grab a yellow highlighter pen and mark each variable expense that shows an increase. Only highlight the year or column when the expense increase occurred. So, for instance, if truck fuel was 0.05 cents (five one-hundreds of a cent) in year one, then increased to 0.10 in year 2 and stayed at 0.10 in the third year, only highlight the second-year column. If truck fuel went down to 0.05 again in the fourth year, don’t highlight anything because you only want to concern yourself with expenses that have gone up and stayed up.
Once you have all the escalating variable costs highlighted, prioritize them by incremental increases, listing them on paper in order of most to least, displaying the degree of negative impact on your bottom-line. You may not like what you see, but you’ll at least be fully aware of what happened.
Theoretically, the reason you want to grow is to produce more bottom-line profit. When do you grow, because fixed expenses stay the same and variable expenses are supposed to stay the same, you automatically end up with higher operating profit on both a dollar and cents basis. Another way to look at it is if your gross margin goes down, volume growth with cost containment allows you to produce the same operating profit. When costs escalate, you undermine profit and the list you just created shows which expenses are the culprit and the degree of negative impact on your bottom-line.
Now on to the challenge of figuring out why the escalations occurred and if and what you can do about them. For instance, with the example of truck fuel, the increase may have occurred solely because the price went up, something you cannot solve. Cross off all items like this from your list that you cannot change.
Now you’ve come to the hardest part- tackling cost reduction for what remains on the list. Start with your top three highest per-gallon incremental cost increases. Translate what those increases mean to your company in hard dollars.
Next, for each of the top three costs, gather up a small group of employees that are actively involved with each cost. Working on three goals at a time is the maximum number companies find they can work on without losing focus and effectiveness. You may have one team or three different teams.
Explain your analysis so far, including the impact that cost is having on the company.
Each team is to set an achievable goal for their expense. Once they set a goal and have a written action plan including concrete steps to take, deadlines for each step, and a person responsible for each, consider offering a reward for achieving and maintenance of the goal- have a party, give small bonuses, etc.
Using this strategy, goal by goal, you can and will achieve full cost containment.
