The challenges of running a business in today’s ultra-competitive landscape are daunting. Managing rising raw materials costs, a multi-generational workforce, disruptive technologies and changing consumer expectations puts enormous pressure on business owners to protect margins, remain competitive and sustain profitable growth.
That being said, if you had the opportunity to get the leg-up on your competition, would you take it? Investing in innovation, R&D, expansion, or new talent all costs money—which you probably think you don’t have. But what if I told you there’s money to be found, if you look in the rights places.
Analyzing SG&A can uncover up to 30 percent in savings
Most businesses can unleash cash by looking closely at their internal sales, general and administrative (SG&A) expenses. Companies often overlook SG&A expenses because they deem them insignificant, or they simply don’t have the time to examine them closely and address them effectively. And it’s easy to understand why. There are no formal guiding principles or governing licensing bodies in Canada for procurement (I.e. no equivalent of GAAP used in Accounting), and few tools available to help organizations manage this kind of deep dive into internal expenses.
Doing a thorough analysis of SG&A expenses on a regular basis—through an Expense Reduction Analysis (ERA)—however, can yield anywhere from 5 to 30 percent savings in operating costs. The increase in cash flow can help mid-market organizations address the ongoing squeeze they continually face, where suppliers want to increase their prices, while customers demand lower costs. The added profitability can be used to fund growth opportunities – so it’s well worth the effort.
Where to start
There could be anywhere up to 100 indirect expenses that a business can incur from operations – some of the most common you can target for savings include insurance, merchant fees, freight, print, telecommunications and internet service, travel and entertainment expense management, and waste management.
An ERA examines the largest of these areas of spend first, studying your contracts, if you have them, to ensure they provide the best possible services and performance from your vendors. Next, an ERA analyzes your expense reports and invoices to ensure you’re not overspending, under-utilizing resources, or experiencing billing errors.
If any of these issues appear, ERA specialists can:
- quantify your potential savings
- renegotiate your contracts
- speak with your vendors to fix and reconcile any billing errors
- adjust any orders so you’re only spending on the services and products you need to operate your business efficiently
- outline a project plan so you can see exactly where and when your savings will hit your income statement in the months ahead
The benefits of a contract
One of the key reasons mid-market companies have increasing challenges with their SG&A expenses stems from a lack of contracts with vendors. Many entrepreneurial organizations rely on a verbal agreement or a handshake, neglecting to get the details of their agreement down on paper and signed by both parties.
A contract not only outlines terms and conditions, but it can also be used to document discounts, incentives for paying early, and service level agreements to ensure you’re getting the quality and satisfaction you’re looking for. And reviewing your contracts on a regular basis to ensure your vendor is meeting its obligations and the service levels you want, is critical to extracting the most value from them.
Are you a good candidate for ERA?
You know your company could benefit from ERA if you:
- overspend and waste resources
- have few, if any, contracts with suppliers
- don’t have the systems or resources to track your spend or contract compliance
- haven’t been to market with a proper request for proposal in the past two years
- don’t have the time or expertise to examine your SG&A expenses thoroughly and negotiate with your vendors
- have a procurement function that lacks insights, rigour and reporting
- need to focus more on revenue growth or improving gross margin opportunities
- want to crystallize value through a transaction in the next 24 months
Reap significant savings
Whenever you’re buying more than you need, spending more than you have to, or not taking advantage of optimized vendor contracts, you’re negatively impacting your cash flow and profitability. And it may be the reason you’ve put off strategic decision making and growth opportunities, thinking you can’t afford it or can’t take the risk.
ERA can help your company reap significant savings; however, freeing up cash to inject into growth investment opportunities will put an end to those nagging decisions while creating a new ERA of profitability for your business.
Felix M. Gelt is a Principal in the Performance Improvement practice, leading the Expense Reduction Analysis (ERA) team at Farber Financial Group. Felix can be reached at 647-796-6004 and firstname.lastname@example.org.