By André Chaves, partner at FALCONI
I will boldly begin this discussion of expense management by paraphrasing esteemed professor Vicente Falconi: “Only low cost protects entrepreneurs.” While this truth is powerful and current, it is always important to qualify what exactly low cost is and how managers should pursue that goal. Managing expenses is not simply about cutting, but consistently seeking to eliminate everything that does not add value to the business.
Cutting spending wisely requires an in-depth analysis of resource usage to accurately define how much we can reduce. To accomplish that, there are renowned and powerful techniques that are accessible to any organization. Let’s take as an example some of the most common types of spending in retail: staff expenses, store operations, and sales.
In relation to personnel expenses, we recommend two approaches: seek productivity in operations and simplify the organizational structure. To identify opportunities for increased productivity we must eliminate activities that do not add value, but that consume people’s time, thus increasing the number of employees (e.g., a sales report that no one reads but consumes a salesperson’s time). It is also important to ensure that the operational work is standardized so that everyone knows the best way to perform a certain task (e.g., how to operate the cash register to reduce customer waiting times and the number of cashiers required).
In relation to the management structure, we need to look carefully at what functions each area performs, eliminating the tasks that are done in duplicity (e.g., sales team and the financial department both doing the monthly closing) or by the wrong team (less productive) or even by the wrong hierarchical level (higher cost). Another common problem is having too many managers with very few people on your team (e.g., a manager who has only one supervisor), generating a proliferation of “specialized” but often unnecessary areas that swell the organizational chart and complicate communication and internal processes.
For typical operating expenses (e.g. rent, cleaning, electricity, etc.), we must establish indicators that effectively measure the consumption of each resource as well as its unit price. For example, in an automotive retail company, we studied their expenses doing credit checks, and we noticed that there was a large variation in the average amount (BRL/check) between the stores.
We found that there was no standard that determined which query was most appropriate for each type of sale, leading to excessive use of the most complete and expensive option. Another example: when analyzing electricity expenses, we realized that the store was always cleaned at night, after it closed. A simple schedule change to cleaning in the morning, before opening, generated a great reduction of consumption, because the daylight made it unnecessary turn on several of the lights in the showroom. The same approach extends to contracts. In establishing effective metrics for understanding the benefit (e.g.: property security expense/square meter of protected store), we are better able to negotiate effectively with suppliers.
Among commercial expenses, there are two types of expenses where there are usually significant opportunities: marketing expenses and commissions/incentives. Both have the function of promoting sales growth and, by definition, add value. However, often they are controlled inappropriately. In the first type, to find the waste, it is necessary to study the “return on investment” of each action (e.g.: for each BRL of advertising in a certain media channel, what is the return in store flow), identify the practices that generate better results and prioritize their use.
In the second type, the key is to uncomplicate the variable compensation policies of the sales force and align them with company interests. In one client, we identified that combining commission percentages with campaigns generated such a tangle of difficult-to-track criteria that no salesperson could understand it very well. Moreover, in certain combinations, the final margin was negative, since the incentives consumed the entire profitability of the product.
Therefore, establishing clear rules, using the right incentive, avoiding overlap, and aligning compensation with the profitability of the sale are approaches that will significantly improve the quality of the spending.
The combination of these and other techniques allows the manager who is seeking efficiency to clearly see the difference between investments, essential expenses, and waste. Their use, along with clear action plans and robust results governance are capable of producing excellent results in retail organizations, greatly contributing to their competitiveness.
Text published in the March/17 edition of Super Varejo magazine.