Back in February this year I wrote a short post about how Tesco were increasing their use of rail travel to reduce CO2 emissions. It was a good example of how to change your business to both deliver cost savings and be more environmentally friendly. In the February 2012 edition of CIMA’s Financial Management (pp 26.30), there is a great article written by Ben Schiller which provides a number of examples of firms which are seeking ways to reduce transport costs and CO2 emissions. One quote from the article sums up the problems around transport costs “many ships operating today were built to run on $150 a tonne bunker fuel, not a price four times that”. Of course, it is not only ships but all forms of transport which are facing these price increases, such as road haulage and even company cars (for example, when I bought my first diesel car just over 3 years ago, diesel was 99 cent per litre at my local station, now it’s over €1.50). As a result of these increasing costs, we can see more sleek looking fuel-efficient trucks for example on our motorways.
I found Ben Schiller’s article really great less for some examples we might know about – chip fat being converted to biodiesel, electric vehicles – but more for some real examples from firms we all probably know well. The first way firms can save on transport costs (and green up) is to bring production closer to the market – L’Oreal for example have brought some of their supply chain in-house, by producing thinks like packaging on-site. A second way, is to change the modes of transport. For example, both Philips and Tesco use canals to transport bulky product. Phillips use barges to transport goods to Rotterdam port, while Tesco ship wine between Liverpool and Manchester. In Spain, SEAT rebuilt a short rail line to Barcelona port, carrying 80,000 cars annually using 2 trains a day. Even large shipping companies like Maersk are doing things like “slow-steaming ” (or sailing slower) to reduce CO2 emissions and fuel costs.
There are more examples in the article itself. You can read an online summary here.
Paul Downs is a US business owner who writes on the NY Times Small Business blog. Here is a nice post in a series he wrote on “the numbers I track”. In this post, he focuses on the importance of tracking labour costs. This quote from the post gives a good summary of Paul’s thinking:
“I’m not sure what to think about my labor costs. I have two conflicting theories running through my head. The first: pay people what they deserve. The second: pay people just enough so that they don’t leave. In reality I’m somewhere in between the two. Payroll is our biggest single expense, and it’s easy to let it get out of control and suck up all of the profit in the company”
I’m sure many small businesses experience this same sentiment. Read the full post for more.
In recent years hard economic times have hit Ireland and other developed economies. According to an article in the Guardian over a year ago now, the number of businesses failing in Ireland was 5 times that in 2010 – a huge chunk of these being construction firms. I hope have some sympathy for many of the hard-working business people who perhaps have seen a lot of their money lost. But, there is a part of me (probably the accountant) who is not at all surprised at so many Irish businesses failing. Why? Am I getting more cranky (Yes, of course I am)? Well, let me give me a few of many examples I have encountered over the last few years which seem to show poor decision making. But before I do, I should say that many Irish businesses who started during the “boom” years were already doomed to failure due to a pretty high cost structure e.g. rent.
The first example dates back about 2-3 years now. In the area where I live, we collect an amount of money each year to help maintain the common greens in the area. The landscaping business doing the work was charging about €7000 per annum and a new landscaper offered to do the work for €4500. Both were sole traders with similar costs (as best I could guess at least). The original landscaper said he could not do the work for that price and would not even reduce his current price, so the business was lost. Now I don’t know what either landscaper was thinking, but it fairly obvious that the original landscaper was living in the boom years in my opinion. He could have reduced his price by some amount, say €1500. This would mean his net contribution would fall by €1500, but instead he lost €7500 – a bad decision.
The second example relates to a really nice bakery I visited recently in a more affluent part of Dublin. Yes, the price is of course going to be affected by the area, but having paid €4.60 (ok my wife bought it) for a loaf of sour-dough bread I thought this is not a sustainable business. Even people in affluent areas cut back on spending in lean times. The point here is that I thought the price was more reflective of a time four or five years ago.
The third example relates to an employee within a business. The employee left as €900 per week income was not “enough” for him. The job involved manual labour and some skills, but nothing that could not be replaced readily. The right decision was made by the business owner, which was adiós amigo. The employees decision was rather silly though, as the immediate income from social benefits would be way lower.
These three examples to some extent portray how high prices may have become engrained in the minds of business people following many years of the Celtic Tiger. I like to study how practices have become accepted/taken-for-granted, or institutionalised. When practices become institutionalised, there are hard to change. So I wonder are businesses in Ireland failing because some business owners cannot make the change in their minds to reduce costs or prices? In other words, they are finding it hard to break the institutionalised practices associated with past more affluent times. I know there are many other factors, but based on my experience, at least some business failures in Ireland result from a failure to change mindset.
When a business or manager refers to their cost structure, they are talking about the composition of the costs of the business. Typically, costs are either fixed or variable. Fixed costs stay the same regardless of what happens e.g. how much is sold. Variable costs increase or decrease in line with business activity e.g. the more product sold, the higher the purchase or manufacturing costs. It goes without say that a business manager needs to have a full knowledge of how their business responds to changes in output and how the business itself actually operates. I read a great example of this back in June this year in the Guardian. The article mentioned how Ryanair had started talks with a Chinese aircraft manufacturer (Commercial Aircraft Corporation of China) in an effort to build a cheaper alternative to its current aircraft, the Boeing 737. What struck me was not the cheaper cost of the aircraft, but attempts by Ryanair to design the aircraft with exactly 200 seats – about 15 more than the Boeing. Why 200 seats? Simple answer actually, anything above 200 seats and one additional crew member is needed. Keeping the seats at 200 means that each extra seat could yield anaverage profit of about €40 per seat. Now that’s knowing your cost structure and operations in detail
(Image from Economist.com)
A few weeks ago I was listening to the radio in the car. A news item came on about why Ireland is attractive to companies like Google and Microsoft to set up data centres. It wasn’t tax, or our educated workforce. Much to my surprise it was the Irish weather. Well, I suppose all three are important, but with an ambient average temperature well below 20 celsius, the cost of cooling the data centres falls considerably. Here’s a post I read earlier from Babbages’ blog on The Economist. It gives some great detail on the costs of running these data centres Data centres: Social desert | The Economist. I have to say, as a management accountant weather conditions would not be the first thing I’d consider in cost decisions – a good reason to talk to other people in the organisation to find out what’s going on.
According to a post on the Gulliver blog on The Economist website, the expense of air travel, hotels and all that for business meetings is money well spent. The reason is simple, you can’t drink beer together via email. Obvious! The real issue is that face-to-face meeting accomplish so much more than email, video conferencing, phone calls or any other non-contact medium. The post is based on a Harvard Business Review by Stephen Greer, who mentions the gelling and bonding only brought about by face-to-face meeting. Once these bonds are in place, then email and phone calls can be used. My own experience makes me agree totally. I have resolved quite a lot of business problems in restaurants and bars – not by getting drunk, but by building trust in a less formal environment and getting to know the people better. Try it, but don’t go too mad! But, seriously, read the blog post, it is sound advice.
When I worked in a paper company, health and safety was always a big concern. The machinery used in paper making could be quite lethal in the case of an accident. Quite an amount of money was spent annually by my employer to ensure the safety of all staff, but in particular those exposed to process equipment and machinery. As an accountant, one comment made by a manager on health and safety always stuck in my mind, namely that “there is not return on investment in health and safety”. I’m not going into detail here, but I’m sure you can appreciate it may be difficult to put a financial return on health and safety expenditure.
Another hot topic in business for the past decade or so is energy efficiency. Investment in energy efficient ways of working and running a business, like health and safety, is a good thing to do and probably adds to the longer term survival of a business (and the planet!). But, unlike health and safety, for accountants the return and investment can be ascertained a lot easier. For example, a recent article in The Guardian reports that many well-known UK companies are achieving definite returns on investment. DIY company B&Q saves 12% on CO2 emissions through education of staff and monitoring energy usage; hospitality group Whitbread can save 3% on energy costs just by changing behaviour. However the article also reports that companies may be seriously underestimating the return investment. recent research at the Carbon Trust in the UK took a close look at 1,000 energy efficiency projects it has been involved with and found that companies can expect to see an internal rate of return (IRR) of 48% on average and payback within three years. In the retail sector, the research shows the average IRR from energy efficiency projects leaps to 82%. Most “normal” investment projects would be happy to see a return of about 15%.
The full Carbon Trust report can be read here.
About a month ago, I read a piece in the New York Times about saving money by making your business greener. I’m no tree hugger, but most of the energy saving tips given by the NY Times (and many others) actually make sound business sense – as well as do something for the environment. A win win situation. The NY Times piece suggests any changes need to start at the top i.e. at the owner/manager level. I could not agree more, as it’s really all about changing behaviour, and only those is power in a business can make and support the changes.
Here’s what you can do in your business:
- I’ll sound like a real accountant here, but start with an inventory of the energy you use, the water you use and the waste you generate. This is your benchmark.
- Try to work out what you can do. Can you get staff to be more energy aware? Can you recycle (or sell) waste, can you recycle water? Can you replace paper with electronics – email invoices for example
- Track what you do and report on it. How much energy have you saved, how much less waste has been generated and so on.