Controlling Costs To Control Profits
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Controlling Costs To Control Profits

Every sign business has a best customer. In fact, studies have shown that 80 percent of the income of most businesses usually comes from 20 percent of its customers. But how can any sign professional tell whether that best customer is generating its fair share of bottom-line profits? Is your best customer costing you money?

By Mark E. Battersby

Very few sign professionals utilize cost accounting or make organized efforts to control costs in their businesses. Surprisingly, however, many sign professionals who overlook the benefits of using cost accounting as a tool for improving their operation's bottom-line are quite successful. But are they as successful as they could be?

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  • A retailer may "markup" the goods sold by a fixed percentage that they label as "profit." A contractor may tack on a fixed amount to each job or service performed while the manufacturer usually adds overhead costs to each job bid. How do you price your products and services for profit?

    Unfortunately, few sign professionals seem to have any realistic basis for their "profit" additions. Some sign professionals, however, employ "costing" to help them understand the real cost of each service performed. Knowing the cost of a product or service is the first step to setting profits.

    A recent study of the Annual Ratio Studies compiled by H.R. Margolis Company, certified public accountants, and released by the Printing Industries of America revealed that the graphic arts industry's most profitable companies incurred significantly lower support expenses -- that is for administrative activities, marketing and sales, estimating, customer service, purchasing and scheduling -- for each dollar of earnings produced.

    Obviously, printers are not the only ones who can benefit from keeping track of or accounting for costs. There are, for example, a number of strategies useful for controlling the costs in your sign business. And, best of all, not all of those strategies require large outlays of either time or salaries.

    Cost Accounting
    Cost accounting is defined as the process of allocating all costs associated with generating a sale or performing a service, both direct and indirect. Direct costs include any materials, direct labor (the total wages paid to the workers who actually perform the service), costs paid to others, etc. Indirect costs include all other costs associated with keeping the sign operation's doors open for business.

    As profit margins have shrunk, many sign professionals have discovered just how valuable cost accounting can be as a tool in their business. By knowing the total costs associated with the performing of the services offered or the products produced by the business, a sign professional can determine which are the most profitable. Thus, the efforts of the sign professional and the business's employees can be focused on those areas rather than on ones that offer little or no bottom-line enhancement.

    In the beginning
    Before any sign professional can determine whether cost cutting will increase profits, more information about their business is needed. Proper recordkeeping is the start. After all, business records provide the financial data needed to prepare a budget, profit and loss statements, break-even calculations and operating ratios.

    Whether prepared by an accountant or the result of a computerized bookkeeping system, every sign professional already has access to the financial statements of their business. Those financial statement can be used to control the costs of the business. That's right, those basic financial statements provide a wealth of information that will help everyone to better understand the costs of the sign operation -- both the direct and indirect costs.

    Most profit and loss statements show the various expenses for the accounting period as well as a percentage figure. It is not at all difficult to see that if utilities represented two percent of expenses last month and nine percent this month, that something more than someone leaving the lights on is happening and needs attention?

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    How much does it cost you to open the doors? Most sign professionals are aware of what their true costs of operating are or where those costs occur in the business. Unfortunately, very few business owners or managers can answer the question: "How much does it cost you to turn the lights on?," honestly.

    A good start involves identifying the areas in your business on which you and/or your employees spend time and money. While you may feel that you don't need to justify spending either that time or money, chances are that you've blind-sided yourself to lost profits. In fact, in certain operations your failure to trim costs or acceptance that this is the only way it can be done may have a noticeable impact on your bottom-line.

    It doesn't take a cost accounting system to reveal that customers can vary greatly in the demands that they make on the business's resources. Traditional costing systems usually put support costs into a pool that is distributed across the operation's cost centers, a procedure that many experts say can distort the true cost of performing a service or producing a product.

    Consider, for example, a customer that requires 10 estimates and 10 sales calls. Under most costing systems, that product or service is usually assigned the same support costs as one that doesn't require as many estimates or sales calls. A relatively new cost accounting system provides a solution for this inequality.

    The ABC’s of costing
    Many sign professionals are already utilizing a variety of systems to "cost" the services they render or, in some cases, the products that they produce and sell. Unfortunately, most costing systems -- even many of the computerized costing systems -- routinely assign a percentage of the business's overhead costs to each service offered or product sold. In other words, all fixed overhead and general expenses are allocated on a basis that ignores a customer that may require an extra amount of hand-holding or personal attention -- or receive an unequal share of the operation's expenses.

    Enter Activity Based Costing or "ABC." Far more sophisticated and far more time-consuming than traditional costing systems, ABC gives every sign professional the tools needed to see not only what a specific service or product costs but also what it costs to service a given customer.

    ABC goes far beyond basic costing, even computing the costs attributable to one customer. ABC can help the owners and managers of every sign business understand how much it costs to perform a particular service, operate a particular piece of equipment, not to mention showing how expensive each of the sign business's nonrevenue generating activities is.

    The ABC approach calls for mapping all of the sign business's workflows and processes so that each activity that contributes to costs is identified and tracked through the system. To improve efficiency in the support activities, a sign business's owner or manager must be able to identify what specific support activities the business is performing, describe in detail how it is performing those activities and establish how much it is spending on those activities. ABC systems ask much different questions than traditional costing systems. For example:

    • What activities are being performed by your resources?
    • How much does it cost to perform organizational activities and business processes?
    • What is needed to perform specific activities and business processes?
    • How much of each activity is required to perform a particular service, use a particular piece of equipment or service a particular customer?

    Too Controlling
    The reduction of specific fixed and variable expenses can improve the profit picture of any sign business. But beware: don't cut costs needlessly. Legitimate expenses provide the framework for the business. No sign business should cut their operating budget too deeply because it will adversely affect the overall operation of the business.

    Thus, along with cutting costs, every sign professional should also consider the alternatives. A business can reduce costs without cutting specific expenses. All that is required is to increase the average income per sale, per customer, per cost center, etc..

    By increasing the overall value of a sale to each customer, for instance, the sign business spreads the same expenses across a large income. The result is a better sales vs. expense ratio.

    The Ultimate Costing System
    Cost accounting is merely a tool. Although not every sign business will use this tool, those that do will find that it can help identify areas where costs may be higher or rising at a rapid rate. That tool shows the sign professional how expenses are distributed from year-to-year while identifying areas that should be reviewed. Most importantly, cost accounting can provide the answers to a number of questions such as:

    • Can you negotiate a better lease?
    • Can you renegotiate long-term debt at a better rate?
    • Can you earn discounts by meeting accounts payable deadlines earlier in the payment cycle?
    • Can you cut specific costs for specific time frames in order to reduce overall expenses?

    Most importantly, cost accounting can answer the question: "How much does it cost you to open the doors for business?"

    Using the budget to control costs
    The budget of a sign business should be a vibrant document, one that is understood and that is used on an ongoing basis. While it is s part of a historical reporting system, it should not be used only to see how you've measured up to your goals months or even weeks after an accounting period has closed. Rather, this important information should be checked far more frequently.

    When you created the basic chart of accounts for your business, you created a list of general categories such as office expense or repairs and maintenance. For the purpose of a profit and loss statement, those categories are all that are required. For the purpose of cost control, however, breaking down these items into subcategories might be warranted. For example,

    Utilities

    • Gas
    • Electic
    • Water
    • Sewage

    Office expenses

    • Supplies
    • Equipment leases
    • Postage
    • Temporary help

    Insurance

    • Liability
    • Auto
    • Health
    • Life
    • Workers' compensation.

    This will give you detailed information on exactly where the money is being spent so you can monitor and correct any serious excesses. Comparing your fixed expense to the budget and the amount spent a year earlier on the same item is a good way to see if you are still in line -- still controlling costs.

    Even when the trend is exactly where you want it to be, you should not give up the habit of monitoring your ____ business's costs against budget. You can create a statement with the headings of: Budget 2004, Actual January (or whatever month it is), Year-to-date (YTD) and a +/- category.

    Down the left-hand side of the statement, will be the Income, Cost Of Sales and Gross Profit. Thus if you had anticipated income of $600,000 for 2004 and your income for January were $42,000, and your budget was set for $50,000 for January, then you will know at a glance whether you are over or under in any budget category. You can then research the line items if necessary to identify and correct any problems.

    A healthy sign business can bring a good return, long-term, to a prudent owner. Don't make the mistake of choosing short-term satisfaction -- or profit -- at the risk of long-term stability. By knowing the costs in your business, you can not only ensure profitability but know what expenditures your sign business can actually afford.

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