IFE ADEDAPO writes on how businesses can manage overhead costs and increase their profit margin
Overhead cost of running a business has often been regarded as one of the factors that lead to the death of small businesses as well as established organisations.
The manufacturing industries in the country are crumbling under the heavy weight of the cost of power generation, multiple taxation, competition with cheaper smuggled goods, bad debts, high import duties and government policies.
The textile industry and the manufacturing sector as a whole and many small and medium enterprises that were unable to meet up with business demands are no longer in existence.
Experts warn that if expenses are not managed appropriately, the same fate may befall companies that seem to be currently vibrant.
Expenses which range from travel to marketing, asset acquisition, information technology services, repair and maintenance, health costs and employee compensation are all capable of causing insolvency if not well managed.
Moreover, most companies fail to manage their indirect spending professionally.
Accenture in its research discovered that an average company effectively manages less than 50 per cent of its spending, falling far short of best-in-class organisations at 90 per cent or more of addressable spending managed.
In its report titled, ‘Five Biggest Areas of Corporate Spending Waste,’ the organisation say there is good reason to worry about indirect spending because the savings potential through its improved management is significant.
As mostly done in some organisations which fail to deliver high profits because they are unable to identify the potentials in reducing cost, Accenture advises that they need to do more with less, and deliver higher margins.
High utility bills in regulated markets
The report notes that utility costs represent one to two per cent of indirect costs for most companies, or as much as four to five per cent of costs for heavy-use manufacturers.
Other than taking energy conservation initiatives and hedging costs of natural gas and fuel, it adds that most companies assume they can do little to manage energy costs that are influenced by volatile energy markets.
This prevailing perception, according to the report is the first example of needless corporate waste in action.
It explains, “Consider the common misconception that in regulated markets, with no choice of energy providers as in deregulated markets, utility rates are non-negotiable, leaving few opportunities to drive savings.
“This is not the reality. Within regulated markets, there are many tariff rates and options available based on usage thresholds, keeping in mind that because usage is dynamic, the rate environment is as well. A thorough analysis of a company’s regulated utility usage and rates can yield substantial benefit. Don’t assume that your regulated rates are optimised just because you are using a utility bill payment service.”
The report says given the right data, consumers can determine energy rates they should be paying and uncover incentives, rebates and applicability clauses available to them, adding that if new tariffs are applicable, savings of eight to 10 per cent may be realised.
The Accenture report explains, “Identifying and correcting errors can yield immediate savings in the form of lower ongoing utility costs. Depending on the jurisdiction, there may also be an opportunity to capture refunds on overpayments. In addition, audits can uncover other benefits being missed.”
Cost of health management
By failing to take advantage of medical specialisation, experts note that high health bill can be incurred by corporate organisations.
The business report says not only are surgical costs a large cost driver but companies are wasting money by overlooking opportunities to take advantage of rapid specialisation in the medical field.
Specifically, it says some hospitals and medical facilities have focused on becoming specialist facilities or centres of excellence and they are becoming destination sites for significant and/or high frequency procedures ranging from hip and knee replacements to cancer surgeries based on their superior track records of efficiency, patient outcomes and cost.
It suggests that companies can use these hospitals to stop wasting money on surgical expenses at facilities with higher costs and lower quality outcomes.
The report reveals that this approach can introduce cost savings—including travel expenses— for many procedures of 30 to 50 per cent.
Not benchmarking media performance and spend
Marketing spend is a very large spend area for most companies, ranging from one per cent of sales for manufacturers to six per cent to seven per cent of sales for consumer products and life sciences companies. Within the marketing category, media forms approximately 75 per cent of marketing spend.
Not challenging fuel surcharges from transportation providers
Logistics costs can be one of the largest areas of spending for many companies, ranging from one per cent to nine per cent of sales depending on the industry, experts say.
Accenture’s report states that within this large cost area, fuel costs are typically the largest single component at 30 per cent to 40 per cent of overall logistics costs.
It adds that shippers are wasting money because they do not actively manage their fuel costs—in part because fuel costs are viewed as a pass-through cost from the shipper and are based on unmanageable market variables.
As with many spending areas, suppliers hold an informational advantage over the shippers, so shippers tend not to challenge the pricing assumptions used to determine fuel charges.
To stop wasting money by overpaying for fuel, experts suggest that shippers can flip the script by tapping real-time market intelligence to apply a “should-cost” approach to fuel cost estimates. With accurate mileage estimates based on actual truck/asset types, as well as accurate fuel prices along particular routes, shippers can calculate what fuel costs would be for a particular route.
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