Process: AP – Expense This!

Cost word cloud, business concept

Do you really know what that expense is for? Get your accounts payable team members out on the floor (store, factory, etc.) to learn what is generating the costs. In fact, get ALL your accounting and finance team members out there. Network with the operations people, offer to help them out. They might benefit from the exercise too. Especially if they are a newer hire. Look at each area of your business and find out what drives the costs. Start at the top of the income statement and work your way down.

Sales – how do you get them? The sales force generates leads, sales, spends money on advertising, travel, trade shows, car rentals, commissions (are they really driving the correct or desired behaviors or outcomes – i.e. higher sales and margins?) discounts, allowances, returns, etc. Make a list of all their costs line by line then assign an accounting or finance team member to find out what really drives the cost of each item. Chances are you will find the 1 or 2 key drivers and you might even uncover a key metric or two that you should be tracking.

How about cost of sales? This is a huge area for most companies. Divide and conquer. Assign the following items: raw material purchases/inventory, labor, overhead. Breakdown the labor and overhead costs into production variable, production discretionary, fixed overhead (rent, insurance, etc.). The idea being this, variable costs should stop completely with production, discretionary costs you can stop at any time. This includes maintenance costs – they are discretionary in the short term. This also applies to labor. The people producing the product will not earn any wages if there is no production going on. Plant managers, leads, etc. who might be on salary are a somewhat discretionary cost, or you could call them a fixed cost if you like. They do not vary with production. They are the same at $1.00 of sales or $10,000. Dig down deep and find out what the cost is, how it behaves with volume changes, and why it’s there in the first place.

General and administrative costs should be subject to the same scrutiny. Keep this in mind for all costs. You are not pointing fingers at anyone or accusing anyone – make sure this is clear from the get go. If an owner wants to buy something or have a fish tank as a corporate expense that’s totally OK! Just make sure they know it’s truly a discretionary cost. Same with any other expense. If your company thrives on fabulous coffee (I totally understand that), just be aware. In tough financial times, it might be the only thing keeping morale up. I actually worked for a company that had major cutbacks. Think one third of the corporate office was laid off! We all had extra work thrust upon us and it was very stressful. There were cutbacks everywhere on expenses. Then the coffee service was cut… That budget item was only about $50-75.00 per month. But we were desperate to cut costs. It caused an incredible, unbelievable backlash. It was the topic of conversation for weeks. We were asked to kick in cash to pay for coffee. Not a big deal really compared to todays’ $5.00 drinks. People out and out refused. There were desks everywhere sporting coffee thermoses that people brought from home. The outrage, the horror! Within a month, the restored it and all was well. People actually forgot about all the other cutbacks and extra work. The coffee shortage energized a mini-riot. So back to the main point. Make sure you understand why something is and move on. Keep good documentation of all your findings. You probably just discovered the true KPI’s as you hunted through the costs. And now you should know what the true drivers of costs, not just what everyone assumes.

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