At Martin Robertson Associates Ltd we are always banging on about how important it is to know your numbers in business, including costs, and recently, at a great event supporting collaboration between Forth Valley businesses and Scottish Universities, I was reminded about this again and it sent me on a little journey into different types of costs....
At the event, a business owner and academic who had been working together through the 'Interface Knowledge Connection' were reflecting on the benefits of their collaboration. The business owner spoke about the value of the dedicated research that the academics were able to bring to the table, their ingenuity and enthusiasm to work up ideas.
The academic described how the business owner brought the real life problem to be solved or useful ideas to be made into reality....and so the collaboration was a perfect match leading to development of new products and services to bring to market.
But the thing that the academic mentioned that I really noticed was that the business owner also had a relentless focus on the question.... 'How much will that cost?'
In business, everything has a cost. This can be a financial cost or opportunity cost and to thrive in business you have to pay attention to both. Plus, more and more, consumers are demanding that businesses think about the social and environmental costs of what they do for the benefit of the communities they live in and the wider world.
Financial Cost - Money
It's very easy for costs to escalate and it's amazing how even a small increase in costs can create a big impact on the bottom line... for the worse. A little inflation increase here, a little additional monthly cost there, and before you know it your profits have begun to plummet.
We have seen the impact of the rising costs in the retail sector recently (combined with falling sales) as several major chain stores have had to close stores e.g. Marks and Spencer, Debenhams, New Look or, worse still. ended up in administration e.g House of Fraser, Toy's RUs and Maplins.
As a business owner it is absolutely crucial that you keep your eye on costs and review them regularly. First of all make sure you have a bookkeeping system in place which helps keep you up to date with your business spending. Once this is in place, review your costs regularly and keep on top of them.
If costs are rising, make sure you are responding, for example, you can look for cheaper suppliers (remembering the quality you need), consider reducing your overheads or review and increase your prices to cover your costs and maintain your profit margins. Sometimes tough decisions are required to stay on top of costs - especially if reducing your costs relates to employee salaries/wages and letting people go. Avoiding taking such decisions can be even worse and you can end up losing your business altogether and being able to employ no one at all.
When you are a business owner, all the big decision rest with you. Each path you take means NOT following a myriad of other paths and it can be tough to think about the benefits of all the alternatives. We make a best judgement based on the information available to us and on our previous learning and experiences. Then we hope that we have taken the best of all the possible alternatives.
If you have a business partner or Board then talking these things through together, with the input of different perspectives can be a great help. However if you are a solo director or sole trader, doing this alone can be especially tough. It can be helpful to talk these major decisions through with someone you trust and, more and more, there are others out there who can help. Mentors, Coaches and good Accountants can help you think through the consequences of different alternatives, before you 'go for it' with one course of action.
Social and Environmental Costs
As well as the (private) costs a business owner bears in delivering the products or services there are often other (external) costs to others or to the environment as a result of what is done. For example, in building an airport there are (private) costs for the construction of the airport and for the employees etc for the running of the airport. But there are also wider (external) costs to local communities, wider society and the environment. For example, greater congestion as a result of airport travellers, noise and air pollution from the take off and landing of the planes and loss of landscape and wildlife habitats as a result of large buildings, roads and runways.
If we want to build an ethical and well as profitable business it pays to think about the costs to others of what we do.
We can ask ourselves 2 simple questions - 'What positive and negative impacts might this business decision have on the lives of people in my local community, wider society and natural environment?' 'How can I reduce or remove the negative impacts?' Sometimes it can be tough to reduce these external costs without incurring more private costs. But more and more clients, customers and consumers are wakening up to the wider impacts that business has on our world and making spending decisions with these matters in mind. So it is starting to make good business (as well as moral) sense to reduce our negative impacts.
And finally, all of this was triggered by an event on collaboration...which once again confirms my belief that collaboration is more fruitful than competition... but perhaps that's a debate for another article????
If you want to get advice on any of the items in this article please email us at firstname.lastname@example.org