Calling Out the Cost - Part Two
- Posted By Andrew Morgan
As a flashback to last month’s issue, we examined that the day to day operations of every business can easily consume most of the owner or manager’s time. When trading is strong, operating costs are not an issue and are far from the forefront of the mind. However, when trading declines, the opportunity to look closely at excessive operating costs and how they can be reined in becomes more available. It’s only when a business operator drills down on specific expense items that they realise costs have sneakily blown out without being identified earlier.
Considering some of those expenses we touched on last issue included Interest on Finance, Cost of Sales (Stock), Advertising, Pay TV, Bank and Merchant Fees, Commission, Electricity & Gas. Let’s now continue with the following costs that will devour revenue if not kept in check:
- Laundry – there has always been differing opinions within the industry as to what is the most cost effective, on site or off site? Off site involves the cost paid to the laundry for pick up and replacement. On site involves the cost of wages, electricity/gas, linen purchase, water, and chemicals. If off site, then shopping around (if options are available) is a possibility, if on site, then looking into reducing the costs of chemicals, power and labour. Power savings were discussed in the previous issue with solar or wholesale options as a possibility.
- Insurance – this is a big one with a few different issues. Reducing the cost is one problem but also sourcing insurance can be another. Contacting other business owners and finding alternative insurance providers is a must here. Left to simply an annual roll over without review, will see premiums skyrocket without intervention. Seek alternatives if you are not happy with the offering. Consider what the premium was the previous year and what is being offered now and why. Look at the sums insured and the excess. Really pull it apart and determine if you are over or under insured.
- Rent – for the operation of a leasehold motel this expense is very important. Is the rent an acceptable market rent, or too high or low? Rents evolve over time as does the market. Over the course of time they can become too high or low depending on the circumstances and open communication and understanding between the relevant parties works both ways.
- Repair, Maintenance, Renovation – The 40% increase in the cost of building since 2019, results in this area of expenditure becoming problematic. Maintaining the required standard of presentation means constant repairs or upgrades. Completing this efficiently and cost effectively as one can, requires their time and consideration. Seeking cost effective replacement items, etc and quotes to ensure the required job is being completed as opposed to something that may be excessive or more cost effectively rectified. I include renovation here although it is thought of as a capitalised item, however with changing taxation opportunities, some of these costs can be expensed immediately rather than being depreciated over time.
- Subscriptions – what industry or non-industry bodies is the business subscribing to? Often businesses sign up to various groups because it seemed like a good idea at the time and all of a sudden when you drill down on what and who you are paying to be a part of each month, a lot of these are no longer relevant or of interest. Cut what is no longer beneficial and being doubled up on.
- Telecommunications (Telephone and Internet) – making sure one is on the best and most relevant plan/deal available can save dollars. How many phone lines are required? Is the data plan the best for the individual business? Is there a better option available with your current provider or with another? There are a lot of questions that need to be answered here and discussions with the provider (which can be long winded and require time) can be productive.
- Wages – can often be the largest individual expense item within an accommodation business. Constant monitoring can only assist as far as areas such as cleaning goes. The amount of time required to clean a unit correctly without being excessive depends on many factors such as unit size, self-contained or not, floor coverings, number of beds, etc. “Deep cleaning” is a common term for many businesses, which may just be an extension of the “spring clean” that was conducted regularly anyway. Consider wages in all areas of the accommodation business - units, reception, kitchen/restaurant, yard/maintenance. Are these areas operating as efficiently as possible?
All the above items are easily put to one side when occupancy rates are high, and business is good. Take advantage of the opportunity to streamline them when things are not so busy.