Are you spending enough on Positive Costs?

Doorman

Positive Cost ?

In my accounting days (yes, I know most of you won’t believe it – I was!!) we had a few different ways of looking at the costs of a business.

The most popular of these was a very simple analysis – Fixed Costs, which were those costs that would not vary with volume and Variable Costs, which were the costs which did vary according to volume. This was quite a simplistic model, which didn’t always hold up!

We then had other methods of looking at costs such as Zero Base Costing and Activity Based Costing .. interesting stuff indeed!

Since the recession has kicked in I have witnessed first hand clients being advised to cut back on expenses by the accounting fraternity and often they just do it themselves automatically – the types of costs that get chopped first are those that are deemed to be “unnecessary”, which will typically include marketing &¬† advertising spend, sales reps, items like training, corporate entertainment, Christmas gifts, staff entertainment¬† and other “extras”.

On the surface it is easy to figure out why companies would cut back in such a way but you could ask the question: Why spend this money when sales were easier to come by and when it is harder to win business you just abandon them?

Could reduced sales be a self fulfilling prophecy when you cut out certain overheads?

The New Cost Model

Taking the knowledge of my old profession and combining this with what I am witnessing with clients every day I am now proposing a new way of analysing costs.

Here goes ..

There are actually three types of costs:

Negative Costs – ¬† these are the costs that a business is “stuck” with, regardless of volume. It would include Rent and Rates (but not necessarily 100% of these – I will explain that later), Insurance, ESB, etc.

Maintenance Costs – these are the costs of servicing the business that you have brought in. It would such items as staff costs, raw materials, power and delivery costs.

Positive Costs – these are the costs that are all about bringing new business in, effectively the costs, which should have a “positive effect” on the business.

Positive costs are the most important costs of the whole business, they are the elements that are designed to start the engine, the elements that can make things happen, that “trigger” customers to actually place an order.

Positive costs are far reaching and could include surprise elements that you would not expect: the premium you pay to have a premises in a location that will bring in more customers, the cost of washing the car after it has been serviced, the cost of polishing the shoes that have been repaired, the cost of having a receptionist who answers calls promptly and deals with customer queries swiftly.

There could be an element of positive costs to most people overhead in the business – the porter who does “meet and greet” at the door of the hotel, the credit controller who carefully spends time with customers who are experiencing difficulty, the accountant who spends time with customers to understand the business better, the staff party to reward a hard working team and a deliberate initiative to improve morale.

I’m sure with a little effort you will think of thousands of other unexpected examples – all of these elements contribute to bringing in more business and create a “positive effect” on the business.

Of course Positive Costs will include items such as advertising, marketing, graphic design, web marketing, social media activity and even PR!

Positive costs are absolutely essential for generating business for any company – cutting these out may be viewed as a necessary step but it will eventually choke the oxygen of the business.

Recession (or any time for that matter)

Using our new cost model I would suggest the following approach:

Analyse your costs into the different cost categories and work towards –

1. Reducing the negative costs as much as possible

2. Improving efficiencies and work practices so that maintenance costs are as little as possible

3. Spending as much of your overhead budget as possible on positive costs .

I am not for one minute suggesting naive spending – always look for the best value in your positive costs and don’t waste money, making sure they are actually positive costs – that the spend results in increases in business.

Are you spending enough on Positive Costs in your business?

Greg Canty is a partner of Fuzion

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22 Responses to “Are you spending enough on Positive Costs?”

  1. Margaret Brown Says:

    Thank you Greg – clear, concise, something we all have to do from time to time as we get lost in the running of it all, stop think and take stock. Will read again and pass on.

  2. ledgerman Says:

    Yes, It is time to redefine our concepts of cost.

  3. Fachtna O'Mahony Says:

    Greg, very interesting comments, always good to get another perspective on such things so a fully informed decision can be made. All to often cost cutting can be a knee jerk reaction without the necessary thought process behind it.

    • Greg Canty Says:

      thanks Fachtna – how do we take it further?

      1. Reduce negative and maintenance costs as much as possible
      2. Spend as much as possible on “proven” positive costs.

      How do we turn negative costs into positive costs? example: get the security man to act as “meet and greet”. Move to a better located premises where the location does a positive job for the business.

      Others?

      Cheers,

      Greg

  4. Pat Codyre Says:

    Couldn’t have put it better myself Greg!!! The more that agree with your analysis- and act on it – the better we’d like it.

  5. Deirdre Mooney Says:

    Greg,
    Excellent piece – I’ve shared it through twitter.
    It makes perfect sense to me. I believe the exercise of categorising cost into negative Maintenence and positive will bring about a fundamental change in the way the business as a whole is viewed.
    Well done.
    Deirdre

  6. Cassandra Fanara Says:

    Reblogged this on the DIGITAL MARKETING room.

  7. Sean Donohoe Says:

    Once agin, IMHO, an excellent piece Greg and like Dierdre I have also shared it on twitter.

    I suppose human nature (or panic) may have a part to play in understanding why essential spending is instinctively cut at a time when Positive Costs are actually necessary to get “things moving” or bringing in business .

    Once again thank you for a thought provoking, interesting and well argued article.

    Best….Sean Donohoe BSc Dip Pol/Gov

  8. Gerry Owens Says:

    Hi Greg, I give it 3 i’s, Insightful, Innovative and Inspiring.
    Well done

    Gerry

  9. Ray Baxter Says:

    Very good way of doing the budgeting. However it is an over-simplification and every business is different. Cash flow will often have an impact. Survival is the overriding priority for every business and cutting “positive” costs is sometimes necessary in the short term.

    • Greg Canty Says:

      Hi Ray , thanks for reading and for the feedback.

      Is it an over-simplification ? Often positive costs does not mean spending money … it means shifting a philosophy from a negative/maintenance place to a positive place. Cash flow is always important and this is generated from sales less costs – where do sales come from and what is the magic that drives them?

      Cheers, Greg

  10. here Says:

    Awesome post.

  11. How did you survive the recession? | Greg Canty Fuzion Blog Says:

    […] our industry we were particularly vulnerable as many businesses totally shut down on their positive spend and investment in Marketing and PR was deemed by many as unnecessary in tough times. Budgets were […]

  12. The ‘Always Great’ boat | Greg Canty Fuzion Blog Says:

    […] coming in a little easier, moods have lifted, budgets have opened up and people are committing to Positive Costs and positive activities once […]

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