Calling Out the Cost - Part One
- Posted By Andrew Morgan
There is an old saying, with multiple versions available, that goes something like this, “if you take care of the top line, the bottom line will take care of itself”. The meaning here is that if you focus your attention on a business’ Sales Revenue, the Net Profit will automatically be there. Effectively saying, don’t worry about the costs in between the top and the bottom line.
With all these similar types of sayings that get thrown around, there is an element of truth, however there is also an element that is overlooked. In this case, what is being overlooked is the level of cost to produce that Sales Revenue. Personally, I like the saying, however I am also cautious that the element here being overlooked or glossed over (being operating costs), could potentially result in a Net Profit that is not what may have been expected.
Business owners, operators and managers often get caught up in the day to day running of their business with marketing, cost minimisation and other important matters get pushed aside under the belief that one is too busy taking care of the top line. It is common that only in tough times, that we stop for a minute and consider working on the business as opposed to in it. One way to work on the business is to focus on individual operational costs. What is it costing to run the business and get the product on the shelves? In the case of accommodation, what does it cost to be able to sell a room for a night?
When business is good the challenges are more about getting the shelves stocked to be able to sell the product, with no real reason or motivation to breakdown the operating expenses of the business. Those costs lingering in the back of one’s mind that may be considered high or excessive are brushed aside on the basis that sales and income is good, so it’s not an issue. It’s only when revenue declines that the costs suddenly become an issue. The profit that was there previously has been eaten away. The motivation to look more closely at each expense item in the Profit and Loss Statement should then lead to the general ledger, and a more thorough examination commence. This can be an unexpected eye opener!
Here are some expenses within accommodation businesses that can be drilled down on, to work on reigning in and achieving a better profitability position.
- Commissions – considering this expense item conjures up thoughts of unnecessary and excessive costs being incurred by accommodation businesses. Look at how guests found the business and ensuring they can book easily and directly via the business’ own website, to cut the cost of needless commissions whenever possible.
- Electricity & Gas – this is always a heavy expenditure for any accommodation business and needs to be minimised wherever possible. Actions such as moving to solar power or wholesale providers are areas where these expenses can be researched for a better deal. One or the other may be more suitable, depending on the situation. With a bit of time and effort researching this, there can be substantial savings available in an often seen as, having to “accept it” type expense. Similar to Insurance, if left without intervention, the cost will get out of control.
- Interest on Finance – generally one of the major expenses of most businesses. It is never a set and forget situation, which ends up often being the case. The interest rates available for business and commercial lending have increased. Contacting the lender to negotiate a better rate may be possible or refinancing with another lender may result in a dramatic reduction in the cost of interest to a business. As with most things, it pays to discuss and shop around.
- Cost of Sales (Stock) – the cost to purchase stock can be looked at in regard to the supplier and if it can be sourced cheaper elsewhere. Obviously, quality will be a consideration here also. Wastage may be able to be better controlled by upgrading or amending systems within the kitchen or laundry areas.
- Advertising – excessive and outdated advertising and marketing that may have been in place for years, or has not been reviewed in a while, is a good place to look for cost saving measures. Focusing on “bang for one’s buck” is the key here. Looking at what has been working and what has not, is a good way to cut excess spending on obsolete items.
- Subscriptions/Pay TV – This can be a very high expense for businesses and in a lot of cases has been excessive for what a small operation may need. There are many options now available if these packages offered do not quite fit or if there is a take it or leave it attitude. Streaming services are growing rapidly in numbers, popularity and in what they offer. Again, it all comes back to having an option or a more cost-effective alternative.
There is much more to consider here within the operating costs of an accommodation business so we will continue looking further at cost minimisation in next month’s article.