Enterprise

Focus on obvious costs and ignore invisible ones at company’s peril

pesa

Most business owners focus on cash coming in and going out and forget that they could be losing money through preventable mistakes. PHOTO | FILE

One of the most common self-destruction habits in most businesses is trying to cut crucial visible costs while invisible ones are let lose to weigh down the business like cancer.

During the December festive season I walked into a gift shop and browsed for something to buy. The shop had many attendants and few customers. Being naturally aversive to crowded areas, I thought it was a perfect place to scan different items and make an informed choice. I was wrong.

One of the attendants warned me that they don’t open items ostensibly to ward off non-serious buyers and to minimise chances of damage or items getting dirty.

So she curtly told me that if I wanted to see what was inside I should pay first.

When I tried to argue with her on the importance of allowing customers to see what they are buying, she readily agreed with me saying the problem lay with the shop owner whom she accused of being mean to staff and unfriendly customers.

She mentioned something else about her boss that is worth noting. She said the business owner was trying to cut costs but did not know how much he was losing in sales.

I walked away to another shop where staff were friendlier and after asking me to describe the beneficiary of the gift, they presented me with many suitable options, and even helped me to make a choice.

I don’t need to mention here that they influenced me to spend a little more than I had budgeted and I would not mind going back.

Quite often we focus on direct or visible costs and forget the many invisible ones.

Invisible costs include those associated with poor customer service which repels clients or dissuades them from coming back after the first buy or recommending others to buy; poor inventory management characterised by overstocking or frequent sellouts; and unnecessary transport or delivery costs due to poor coordination.

It also includes unnecessary rent, overstaffing, and any unused resources including money kept in current account while servicing expensive loans.

In most cases invisible costs do more damage to a business than visible costs. Addressing or minimising the costs can turn around a venture faster than trying to cut spending.

During tough times most firms try to cut essential costs in visible areas when they are actually bleeding profusely in invisible areas. This is simple because unlike in direct visible costs, their existence are hard to detect and quantify.

For example the loss caused by mistakes of cheap untrained staff or incompetent employees, misuse of stationery, late deliveries which annoy customers, and time wasted to retrieve information due to poor management do not click in the minds of many employers. Yet they lead to huge loss of potential revenue.

Most business owners focus on cash coming in and going out and forget that they could be losing money through preventable mistakes such as under invoicing, late collection of payment and loss of data which makes payment follow-up impossible, and keeping staff who do not add value to the business.

As a business owner it is your responsibility to understand and track all costs. Ensure you have the right team that is well equipped and motivated to discharge their duties.

Managing invisible costs requires total cooperation from all employees. The secret is to hire competent employees, train and motivate them well. Give them limited allowance to make mistakes and learn from those mistakes without consequences such as salary cuts.

Being made to pay for mistakes demotivates and instils fear in employees.

Mr Kiunga is a business trainer and the author of The Entrepreneurial Journey: From Employment to Business.
Email: [email protected]