In many blogs and articles, a reference is often made ‘the cost of doing business’ especially in relation to startups and small businesses. A question I often pose in a class or seminar is ‘what exactly are they referring to?’ and ‘why should we care?’.
The cost of doing business isn’t just the expenses paid or investments made by a small business. For instance, there is talk of raising the minimum wage to $15/hour. For a lot of businesses, this may increase operating costs but businesses have ways of figuring out how to avoid such costs by reducing employees, shifting everyone to salary, or outsourcing more things (Side note: The real impact of a higher minimum wage is that it is the benchmark for many labor contracts so it really serves as a means to increase hourly rates). Other costs such as health care, taxes, etc. are also ‘costs of doing business’.
In reality, however, the most important cost to a small business is how the founding team spend their time. Employees can spend their time in two ways: value-added and non-value added. “Value Added” time and costs relate to spending energy on activities that help the company accomplish its mission and vision. For instance, if a small company has the mission or goal of improving customer service, management will spend the time and money on making such an activity better. The hope is that if the customer service improves, sales may improve and hopefully impact profits and cash flow. On the other hand, ‘Non-Value Added’ activities are those processes and tactics that don’t necessarily help an organization achieve its mission and vision. If small businesses are faced with inordinate amounts of rules and regulations or have to spend a good deal of time completing reports for external entities, they can burn incredible amounts of time on activities that are taking away from improving and growing their business.
Many years ago, as a sales representative at a biopharma company, I really gained an understanding of value-add vs. non-value-add. One example comes to mind. At that time, fax machines were the primary means of communicating contracts, prices lists and important documents to customers and corporate administrative staffs (yes, this was before email). The company didn’t want its sales force to have their own fax machines that the company would pay for. For a lot of good reasons, the company didn’t want to get in the business of managing thousands of fax machines in the sales force where the company would have to track the assets, depreciate them, and make sure that reps were using them for company business. Instead, the company would pay for the rep to go an office supply store and pay for any faxes that needed to be sent, which back then might have been a few dollars or more page.
Well, this didn’t make sense when put in the context of value-add framework. It wasn’t the cost of the machine or the faxes that was the issue. It was the time it took to drive to store and send the faxes, which on average we estimated to be 20 minutes or more. At this point, most would say ‘big deal’ you’re on salary so who cares, it doesn’t affect your pay. Well, yes and no. When viewed through the sales representative lens, this wasn’t the issue. The issue was lost sales time or the time that could be spend meeting with customers and selling. Doing a quick analysis at the time, we estimate that if a rep sent one fax a week using the 20 minute factor, they spend 1 to 1.25 hours a month or up to 16 hours a year on time to send faxes during the day. If a rep sold $1M million worth of product (assuming sales time of 2080 hours/year) they were selling at approximately $480 per hour. Losing 16 hours of non-value added time per year could cost the company upwards of $7,692 of sales per year or approximately $4,615 in gross margin (assuming a 60% margin). Put in this perspective, a $400 fax machine for each rep looked like an easy investment.
Using the non-value added vs. value added framework can put time management and activities in a whole different perspective. Stepping back, evaluating what you are doing in relation to mission and vision can help different the efficiency and effectiveness of your day.