Cost of Doing Business

Remember as children, we all played cricket in the neighborhood. If asked, what was the cost, most answers would be Bat, Ball, Stumps, Helmet, Gloves & so on.

The neighbor’s window. The car’s headlight. Bike’s indicator. The street lights.

Missed these? Well, wish if the ball would have missed it too. ??

These were the ‘cost of playing cricket’.

Means to avoid the cost were either punitive – like hitting on that side was Out, or preventive - no runs towards that end.

But was that enough? Surely not. The glasses still broke.

But did we do more? Mostly not. Anything more, would have taken away the fun of playing. Also, these weren’t everyday occurrence.

Well, few things in business, are no different. In most businesses, we have, Cost of Doing Business.

Cost of Doing Business

In one of my stints, we had a problem of recurring input tax accumulation in one entity and output tax payments in another.

This would irk any finance guy. We were no different.

We made a presentation & highlighted to the founders. Problem was understood. Few issues resolved, but none of us had a solution to the entire problem.

Consultants were called. Opinions taken – but the problem persisted.

Business scaled up, complexities went up, regulations further required more deductions, the accumulation now became a multi-crore issue.

We again gathered as a group. All expert opinions were displayed. Many hours of brainstorming only made us reach dead ends. Finally, a founder said, “I think we have discussed this enough. This problem has no solution. Let’s not invest time here anymore. This is cost of doing business. Let’s live with this.”

Difficult to accept for any finance professional. We have been tuned to optimize costs. There must be a solution, we all kept wondering. There wasn’t. ‘Cost of doing business’ as he said.

When does a problem become ‘Cost of Doing Business’?

I go back to my earlier stints. FMCG and Pharma businesses, have a common problem of business wastes in the form of damages, shortages, or expiries. Higher the scale gets, higher the wastes.

As business partners, we had a target to reduce business wastes every year. Most business heads, with their focus on meeting topline targets, play the ‘Cost of Doing Business’ card very early.

Many projects and multiple solutions later, we learnt to reduce these costs, relative to the size of the business. But, the problem, may have in most cases, never ceased to exist.

After preventive actions, one may start penalizing the sales achievements. But how far does one chase?

A commercial head enlightened me with the classic ‘effort v/s reward’ concept.

He said, “we have over the last couple of years, reduced this cost by xx%. To reduce this any further, we should see, whether the efforts of my thousand plus force be worth it? Can we not ask the team to use this time to rather get more growth, to off-set this cost?”

The means of concluding something as ‘Cost of Doing Business’ could be a simple set of questions,

-???????Will we be incurring more cost to solve a lower cost problem?

-???????Can the effort be redirected to get more returns, so that you off-set this cost?

It is essential though, to keep tracking these costs, and rework, to ensure it remains within the limits of being ‘Cost of Doing Business’. So, continue to do what has worked so far.

Contingency fund approach

Project businesses face a unique challenge – ‘Cost of the unknown’. When quoting to a customer, one factors all costs, but what if something gets missed?

The customer will not pay for it. Usually these are supplied ‘Free of costs.’ - ‘Cost of Doing Business’

How do you internally fund it? Offset with other savings in the project or take a P&L hit.

Another way could be, creating a contingency fund. Move a certain % from each project to off-set these unknown costs. This acceptable % is your cost of doing business, but is a provision, until incurred.

Cost of Doing Business to one, may be a Business to another.

It is interesting, how people have found opportunities to create a business out of what someone else has accepted as a ‘Cost of Doing Business’.

Companies & businesses could be bought, for their accumulated input credits.

Businesses with access to faster end user consumption, buy near expiry products cheaper, and gain by selling at MRP or with some discounts, until the expiry date permits.

Consultants have business waste reduction as a big chunk of their own business.

Insurance as a business, has multiple products to off-set what others have marked as cost of doing business – viz. store or in-transit cash loss, AR recovery etc.

Businesses not wanting to invest their time, effort, capital, or any resource, could leverage such other businesses to reduce their ‘Cost of doing Business.’

Move on…

‘Cost of Doing Business’ in any business remains a continual challenge. How expensive is it, determines our efforts & resolve to solve it.

Chase, till it is worth the effort, or if the effort cannot yield a better outcome elsewhere.

Like in every difficult relationship, no matter how much you try or wish, he / she may not come back. ??

Just like life, business resources are short. Learn to move on. Invest, where returns seem highest.

Be frugal, but never be penny wise, pound foolish. Minor hurdles could always be ‘Cost of Doing Business’.