COSTS & EXPENSES MANAGEMENT. A DIFFERENT APPROACH.
We all know that to have a successful business we do not only have to pay attention to sales, but to costs and expenses. Otherwise all the commercial efforts will go to waste.
The tips we will provide here, come directly from the experience of a professional team who has managed costs and expenses of diverse companies for more than 20 years and even though the examples will be adapted specifically to Restaurants, they all apply to all kinds of businesses, and even at home! So, take your notes and prepare yourself!!
COSTS 101. BASIC CONCEPTS FOR A BETTER UNDERSTANDING.
Assuming that not everybody has accounting or finance studies, first of all, here is a list of a few basic and simple definitions we will be using, because it is essential to be all in the same page:
Revenue or income: Cash inflows obtained from delivering or producing goods, providing services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue.
Costs & Expenses: Cash outflows or other using-up of assets or incurrence of liabilities (including accounts payable) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.
Cost of Goods Sold / Cost of Sales: In this category belongs only the money spent necessary to elaborate the products or services. In a Restaurant, examples could be: ingredients, labor, public services, machinery depreciation among other things. These are usually “variable costs” because the amount spent depends on the volume produced.
Selling, General and Administrative expenses (SG&A or SGA): In this category belongs only the money spent to the operation and administration of your business (Rent, Marketing, etc). These expenses are needed either to sell products (salaries of salespeople, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.), or to manage the business (salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc.).
The difference between Costs and Expenses, depends on the nature of the business. Costs and expenses can be:
“Fixed”: These are costs or expenses that you have to pay no matter your commercial activity or sales level and usually have a flat rate. Examples: Rent, insurance, credit interests, bank accounts fees, etc.
“Variable”: These are the costs or expenses that fluctuate or vary depending on if the business production or activity increases or diminishes. Some are directly related to the products or services produced or sold. So, the more you produce or sell, the more you spend. For example: Ingredients, electricity, commissions, labor/workforce, etc.
Margin: Refers to the difference between the cost of goods sold and the income received (selling price). Margins for product sales appear as percentages of net sales revenues.
Profit: it is the financial gain, especially the difference between the amount earned and the amount spent in buying, operating or producing something.
Example:
STEPS TO EFFECTIVELY REDUCE COSTS.
Now that you know what we will be dealing with, comes the “fun part”!
The first thing to do next is to make a Diagnosis -simple but thorough- and identify the different “pain points” or “areas of opportunities”. Do not worry about it, there is an explanation about it afterwards.
Once you make the Diagnosis, you will start designing your plan! How are you doing this? We will give you lots of ideas and initiatives on how / where to find the solutions of most common problems related to costs and expenses, and we’ll do it following an amazing guide… the 7R Model, also known as the 7Rs of Sustainability and 7R Model of Circular Economy, whether you believe or not, the Best Key ever! In the picture below, one of many graphic representations of the 7Rs.
Perhaps you have heard of “just” 3Rs: Reduce, Reuse & Recycle… but 4 more have been added to accomplish “sustainable development”, which is commonly defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Our Common Future - Brundtland Report).
The 7Rs model has to do with understanding the cycle of life of the things you buy and produce. It provides 7 practical ways to manage the economy the way nature does; as very nicely explained in one of Sustainability Illustrated’s videos “circular economy is when everything is healthy food to something else”. Today, unfortunately, the cycle -still most of the time- starts with harvesting natural resources and transforming them into goods. Then we sell them, use them and throw them out, generating tons of waste! Business as usual, right? So, the 7Rs model states that things can be done in a very different way if we think and design creatively and make more conscious use of our resources.
In case you haven’t heard of the 7Rs, here’s a brief description of each of them and what they refer to and you will start making connections with your business. This way you will introduce yourself to this different way to approach things.
Rethink to reassess what you’re currently doing. Rethink the decisions and solutions at every system level by exploring alternatives and restating problems.
Reduce resource use by applying "lean design principles" and extending product life spans.
Repair, components and parts so that products can be used longer by the same or a different user.
Reuse or Repurpose products by transferring them in their original (or modified) form to another user.
Refurbish products by replacing malfunctioning components and parts by new ones.
Recycle materials or resources by disassembling components and separating parts.
Recover embedded energy from non-recyclable waste material where feasible.
Why should you follow this approach? There are many reasons but just to mention a few here is a list, obtained from the website of the International Institute for Sustainable Development and supported as well by the experience of the team involved in this blog:
First of all, because there are new views about competitiveness, survival, and profitability. So, if you innovate in your kitchen, why not in the way you manage your business to make it prosper even more?
It’s proven that when businesses adopt sustainable and responsible practices, then some of the benefits they receive are:
Improved financial performance.
Lower operating costs.
Enhanced brand image and reputation.
Increased sales and customer loyalty.
Greater productivity and quality.
Greater ability to attract and retain employees.
Isn’t it exactly what you need?
In our Post “How to Reduce Costs?” you will find the applications on how each of the 7Rs will help you to find the way to Reducing the Costs of your Business.
We know the approach we are proposing to reduce your Business Costs might not be the traditional way, but we guarantee it is a very effective and long lasting one!!! So, be prepared…