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Tuesday, 31 January 2006 17:00

Boost profits by reducing the costs of doing business

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There's a simple rule in business that if you want to increase profits, you need to either increase sales and revenue, or decrease costs and expenses. 

If you want to work on the expense side of that equation by reducing your costs of doing business, one key is to start to measure those costs as a percentage of revenue. Run that calculation using your past three or four annual financial statements. If that percentage has changed from year to year, one thing will be clear: Decrease that percentage and your profit increases, even if your revenues aren't growing.

Once you have established what your costs have been in the past as a percentage of sales, you can turn your attention to making sure that percentage starts to go down.

Rein in insurance costs

Business-related insurance coverages can be a key area to look at when trying to reduce expenses.

Take your workers' compensation insurance, for example. You or your insurance broker should make sure your employees are properly classified. You may be paying as much as $5 to $7 in workers' comp premium for every $100 in payroll for technicians, for example, while rates for the office workers in your shop may be closer to $1 or $1.50 per $100 in payroll.

Because your premiums are based in part on payroll, a slowdown in work that has significantly reduced your payroll may make it worth going back to the insurance carrier to see if your premiums can be adjusted to reflect the decreased payroll.

As with all insurance, your workers' comp rates are also based on your claims history, so making efforts to reduce workplace injuries will help you reduce costs. Ask your insurance broker or workers' comp carrier to conduct a free safety audit of your shop. They'll point out things that could lead to claims and higher premiums.

Employers can also reduce workers' comp costs by reducing the expense of injuries when they occur. Some states, for example, allow you to designate a clinic where all employee injuries are handled. Get an injured employee back to work - even if on light-duty handling paperwork - as quickly as they are medically able. And if you suspect fraud, push the insurance carrier to investigate. Double-digit annual increases in medical insurance make providing health coverage for employees among the fastest-growing expenses for most businesses. Most companies have already taken the traditional steps to dealing with this: raising their deductible and requiring employees to pay an increasing portion of the premiums.

One of the newer ways to possibly reduce health coverage costs are health savings accounts (HSAs). Such plans can be less expensive because they have a high deductible. Under the plan, however, the company and its workers can put pre-tax money into savings accounts that can grow over time or be used to cover health care expenses.

HSAs may be more appealing to some company owners and employers (particularly those who are younger, healthier or more highly-compensated) than it is for others, but some health insurance providers may even allow you to offer employees a choice of either an HSA or a traditional plan.

In any case, shop owners should get a two-or three-year history of their health insurance claims. The insurer cannot provide specific health care costs or treatments by employee, but they can provide a summary that shows, for example, the total amount paid under the plan for doctor's visits, hospital care or prescription drugs for your company's employees in a given year. Comparing this amount to your premiums can give you an indication what kind of value you're getting for your premiums.

Business property and liability premiums also tend to be dropping after rising dramatically after 9/11, so now may be a good time to shop around, particularly with the five or six carriers who specialize in business insurance for the automotive repair industry.

And just as many direct repair agreements require participating shops to carry a set amount of liability insurance, shops too should make sure their sublet or other vendors are adequately protecting the shop. Ask your key vendors or sublet providers to name you as an additional insured on their policy.

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Out-source and audit

But insurance is just one area shops can look at when working to reduce costs. Payroll outsourcing has become an increasingly competitive service, so if it's been several years since you considered turning payroll over to an outside firm - or shopped around to make sure your payroll service provider is still competitive - this may be a good time to do so.

With fax lines, high-speed internet, cell phones and other telecommunication expenses becoming more complex, shops may find it worthwhile to more closely audit their phone company and related bills. Some studies have found a high percentage of such bills contain errors and that many companies are paying incorrect fees or taxes to telecommunication providers. While you can certainly audit these bills yourself, it may be another service you want to out-source.

Type "telecommunications audit" into an internet search engine, and you'll find dozens of listings for firms that will audit your telecommunications bills on a one-time or ongoing basis. Many of these firms say they regularly find savings of 10 to 20 percent for businesses, and some charge no fee, instead taking a percentage of the savings they find.

More cost-saving quick tips

Here's a quick run-down of some other money-saving tips:

• Fees to process a charge on a customer's debit card are generally half of what they are if that customer uses a credit card. The catch: You need to have the keypad available so the customer can enter their PIN at the time of the transaction. With debit cards now accounting for nearly half of all "card swipe transactions" being processed by retail companies, it can pay to upgrade your processing equipment. Card processing fees in general vary widely, so this is another service it makes sense to comparison shop every few years.

• Most people view their lease as a fixed cost, one that can't be changed until the lease renewal. While this is generally the case, the market for commercial property is weak in some areas, and shops in these markets may be able to negotiate down their rent mid-lease.

• If you're in an jurisdiction in which companies must pay personal property tax, make sure you get rid of any equipment or tools that aren't being used - and that you've taken anything you no longer have off the tax rolls.

• Reduce energy costs by finding and fixing compressed air leaks promptly to reduce the amount of time the air compressor runs. Give all of your technicians garage door openers to reduce the amount of time that overhead doors are open - and letting heat in or out. Many utility companies will conduct audits for businesses, coming through the shop to offer suggestions of ways to reduce energy use. They also can help shops find out about tax rebates or other subsidies that may be available, for example, to cover all or some of the cost to install more efficient lighting systems - which then offer cost savings of their own.

• Think your newly-assessed property tax is out-of-line? It may be worth challenging the assessment yourself - or hiring one of the companies that will handle the challenge for you for a fee. If you out- source this, work with a local company that may know the market better than some of the national assessment-challenging firms.

John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988.

 

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