The Cost of Doing Business

The Cost of Doing Business

What is your cost of doing business?  It’s a question I doubt you’ve been asked very often and I doubt you are excited by it.  That is unless you are an accountant who loves to talk about such things.  From my experience, we much prefer to talk about marketing, product design, production, etc.  At the end of the day, all of our activity is intended to deliver value but how do we measure it?

We are familiar with revenue and bottom line profit.  The cost of doing business is a little different.  Some costs are easy to assess, for example when I purchase goods for resale.  As more businesses are based on human assets it quickly gets more difficult.  This is especially true as more businesses deliver services and their value is intangible.

What is the cost of doing business?

This is the investment we are making in the activities and work that we do every day.  You can measure it in terms of payroll but that misses the point.  We need to assess the cost and value of the activities we are working on.  These are the hidden costs in a business.  If you invest the time to take a look, you’ll be surprised at what you find.

I recently took a look at where I was investing my time and attention on marketing.  I did a simple plot of the services I am offering ranked in order of the profit they generate.  It was surprising to realize I am investing more effort on marketing my free services than I am on my highly profitable ones.  Free services include this blog which takes me about 60-90 mins a week.  This insight is driving me to take a look at how I can shift the balance towards more profitable service offerings.

What if you were going to waste $1M?

This example may not be relevant for you, so let’s explore one that is relevant to everyone.  It’s the cost of losing an employee.  When an employee leaves, someone has to cover for them.  There is the time and cost of recruiting a replacement, and then training the replacement hire.  These are just the obvious costs.  The consulting firm Deloitte Bersin estimates the cost of losing an employee is at least 2x their annual salary.  Let’s say that cost is $200k, you could be throwing away over $1M a year if you lose several people.  If you knew you were going to waste $1M, would you do something about it?  Would it be worth investing in their professional development?

This is the tip of the iceberg.  Improving productivity is another area with lots of low hanging opportunities.  Research highlights that companies with high employee engagement have on average 2-3x higher employee productivity, and much better financial performance.  I’m not suggesting you put on your green eyeshade and brush up on your accounting skills.  Instead, don’t ignore the cost of doing business.  Start to take a look at where you are investing significant effort and assess whether it is worth it.  I also recommend you look for areas of waste, like employee turnover.

What hidden costs do you have?