Hidden Money in Your Business: Ask Four Questions to Find It
ecently, a friend told me he could not attend a professional meeting relevant to his job because of an across the board travel ban. Whenever I hear of a company mandating across the board cuts in travel or any other specific item on their financial statement, I know that the company has no clue about what really goes on in its operations. Some companies seem to enact the same ban every year just after their second quarter results are known. After observing this, employees schedule their travel during the first half before the anticipated ban.
If travel is required to do necessary work, then not traveling will degrade the quality of the result. If not required for the work, then don’t send the employee on the trip. If the work is not necessary, then not doing it will save the travel expense as well as payroll expense and a host of other expense items. Typically, the costs to perform an activity come from a wide variety of financial accounts not just travel expense.
So the key to effective cost management is to focus on the activities needed to accomplish the results desired-and not on individual expense accounts. Of course, judgments and tradeoffs are required. However, these decisions are best made with a focus on the work or activity. Only at this level can appropriate decisions be made weighing the resources necessary to do the work well versus the cost to do the work.
The only caveat to this activity focus is to keep the business process they belong to in mind also. Keeping the process in mind will avoid optimizing one activity to the detriment of subsequent dependent activities.
The first step is to identify actual activities using Activity-Based Cost methodologies. Then the next step is to ask a series of questions:
- Why do we do this work? If there is no good answer, stop doing the activity. No more questions are necessary. However, often it is necessary to keep asking why to cut through to the core reasons for the work. One rule of thumb is to ask “Why” five times.
The next questions assume the work is necessary.
- Why does the activity cost as much as it does? With this question, we’re exploring the cost efficiency. Typically, we want to drive the cost per output lower, assuming all other factors are equal.
- Why is the quality of the activity less than 100%? A low cost is not relevant if the quality of the output is not acceptable. Sometimes, more should be spent to obtain the necessary quality.
- Why is the cycle time of the activity what it is? Here we’re measuring the time from the first time the activity could be performed to when the output is handed off. Cycle time includes any time spent waiting or queue time. On a recent trip to the post office, I spent three minutes with the agent but forty-five minutes in line. The agent was very efficient but I was not happy.
These questions serve to identify cost drivers. Some cost drivers are positive – we want these to happen. More sales should drive more work. What we really want to look at are the negative cost drivers – those that cause high cost, poor quality, and long cycle time. These cost drivers are most interesting. These provide the information that managers should be looking at to reduce cost and increase profits. This is actionable information that can drive operational improvement, optimize cost, and increase profits.
