Businesses live or die on cash flow. Not only that, but you have to bring in more than you spend (make a profit). Good cost control is obviously paramount. The operative word here is “good.”
It may help to understand bad cost control first, so let’s look at a classic example of that. Every so often, we hear about massive layoffs by a mid-sized or large corporation. The CEO typically accompanies the news with comments that the layoffs were necessary.
But a prominent business magazine looked back over 50 years of layoffs and found almost none of these companies recovered from the cuts. Almost all of them eventually went out of business or were gobbled up by another company.
These layoffs were not good cost control, nor were they intelligent strategic choices. Laying people off en masse is a mindless, “no-thinking needed” action. But it does get those quick short-term results that earn the hatchet man his bonus. Unfortunately, it nearly always puts a company into a death spiral. This is cost control at its worst.
The reason for the negative outcome is obvious to anyone who decides to look clearly at what a big layoff actually is. It’s a shedding of the company’s most valuable resource. It’s the employees who provide the services or make the products that bring in the company’s revenue.
A small layoff to realign resources could be compared to trimming your toenails (except for the bad luck of those being laid off), but a large layoff is more comparable to an amputation. And that leg never grows back.
Other forms of cost control also require no thinking—and also get poor results. If you keep in mind that people are your greatest asset, you don’t want to undermine their ability to generate revenue by how you cut costs. But many small shops do exactly that: “saving money” in ways that cost them far more. And they typically begin in the wrong place.
Where should you begin to control your costs? The typical electrical shop operates on a margin of only 2 percent. By underpricing your projects, you are paying the customer money you don’t need to pay. That’s a cost you can easily control. So to correct cash flow problems, look there first.
If your reason for the low cost is a fear that you won’t otherwise get work, then examine how you are marketing your company. Do you present yourself as the shop that will solve X problem? Solving the problem is usually why the customer is seeking a shop to begin with. Focus on that, not on how cheaply you work.
When you estimate the cost of a job, do you include mobilization and transportation to and from the site? Or you do count the labor time needed only to perform the actual work? This is just one of the basic estimating concepts, and if you didn’t know this, then you need to control costs by learning how to properly price your jobs.
Once you’ve controlled the costs that involve giving money away, look at how to improve the efficiency of your employees. That doesn’t mean pressuring them into working faster; that will only increase their mistake rate while lowering their job satisfaction. It means to do such things as:
- Look at your work flows to reduce or eliminate steps. Or change the order of them for greater overall efficiency.
- Look at your work flows to assign steps to the appropriate people. For example, don’t send your Master Electrician for parts; send a helper. If you don’t have a helper, hire one. You will find plenty of cost-effective ways to make that person useful.
- How many copies of the National Electrical Code (NEC) do you have? Are there enough to quickly answer Code questions as they arise? Or do people need to stand around waiting for an answer while you search for where Bill last stashed the NEC book you had lying around?
- Evaluate training adequacy and correct deficiencies by providing the needed training.
- Evaluate your existing test equipment against the capabilities of what you could lease or purchase.
- Watch your employees work. Are they setting up adequate lighting, or are lighting problems lowering their efficiency? What else could they do better from a work process standpoint?
- Have plenty of spare batteries. And put an individual in charge of a battery-charging program for power tools, radios, and other battery-powered equipment.
- When buying power tools, look for a power tool kit that all comes in the same box; it will have two or more batteries plus a charger.
- Ask your electrical distributor about labor-saving tools; for example, power crimpers. And don’t forget to look into tool organization products.
- Ask your electrical distributor about kitting. This can dramatically cut the time in field to complete a job.
- Ask your electrical distributor about any other programs or services they have that could increase job efficiency.
Now turn your attention to some other places where money seems to disappear:
- Is your inventory adequate for most needs, or do you have to make many small purchases often? Do you have capital tied up in excess inventory?
- Do your estimators develop an accurate bill of materials, so the job has the right materials to begin with? Or does someone always have to make a parts run for something that already should have been provided to the crew?
- If you have service trucks, are those properly maintained? Simple things such as using synthetic oil (and changing it often, if your trucks make many short trips) can save you significant money on fuel costs. Have a program for keeping the air filter(s) clean and the tires properly inflated, both of which aid in getting good gas mileage. Properly inflated tires are safer, too.
You can think of many more ways to intelligently control costs. Don’t just put your mind to it; use the other minds in your company, too. Actively seek suggestions, and give people credit when their idea are used.