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In our recent post, How to Measure Anything, we talked about tools for quantifying the things that aren’t so clear-cut for business owners. One of those things is often “hidden costs,” which are expenses that are not immediately obvious or easily visible, but can still have a significant impact on a business’s bottom line.
Some examples are things like employee turnover (which can be huge!), maintenance and repairs (small things can add up to huge MRO expenses), inefficiency and waste (this is what we specialize in, if you don’t mind a shameless plug), compliance, and risk mitigation (think: bonding, insurance, cybersecurity, etc.).
Employee turnover is one of the big ones. It’s costly for businesses, because it requires time and resources to hire and train new employees. Additionally, turnover can lead to lower productivity and decreased morale among remaining employees, which can exacerbate the problem.
Maintenance and repairs are another, because you might have to make 100 “small” repairs throughout a year, but when you add up the cost the total can be surprising.
Waste and inefficiencies. Thanks for enduring our shameless plug. This is usually, for most business owners, the biggest hidden cost, and it’s exceedingly hard to quantify. Inefficient processes, waste, and mistakes can all lead to increased costs for a business. For example, if a manufacturing process is inefficient, it may require more resources and take longer to complete, driving up costs. Overly complex processes can lead to lower productivity that requires a larger headcount to handle all the work.
Regulatory compliance is another one that’s unavoidable, because there is no shortcutting compliance with various regulations and laws, such as taxes, licenses, and permits. These costs can sometimes be unexpected, and failing to comply with regulations can result in fines and penalties. Taking the time to sit down and figure out what you have to comply with will help you start down the path of how to maximize your compliance efforts.
Risk mitigation can be a huge one, depending on your industry. We’re seeing the costs of things like cybersecurity and insurance increase dramatically as the problem grows dramatically. Cyber attacks, in particular, can be costly for businesses, as they can result in lost data, stolen customer information, and downtime. Businesses must invest in cybersecurity measures to protect themselves, which can be expensive.
Hidden costs in a business can be significant and can impact a business’s bottom line. It’s important for businesses to be aware of these costs and to budget for them accordingly. Reducing these costs in your business can be a challenging task, but here are some strategies that can help:
- Analyze your processes: Look at your business processes and identify inefficiencies that may be driving up costs. Streamline processes, eliminate unnecessary steps, and find ways to automate tasks where possible to reduce costs.
- Invest in employee training and pay people well: Employee turnover can be costly for businesses, so invest in employee training to improve job satisfaction and retention. This can help reduce the costs associated with recruiting, hiring, and training new employees. Employee pay can be a challenge for business owners, but higher pay and better training lead to lower turnover and higher satisfaction (which translate to better service to your customers).
- Regular maintenance and repairs: It’s tempting to defer maintenance to save in the short term, but scheduling regular maintenance and repairs will prevent costlier equipment breakdowns and other issues in the long term.
- Monitor waste and inefficiencies: Identify areas where waste is occurring and find ways to reduce it. For example, if you’re seeing a lot of wasted materials during production, look for ways to use those materials more efficiently.
- Stay compliant: Make sure you’re aware of all the regulatory requirements for your business and stay compliant to avoid fines and penalties. Hire an accountant or lawyer if necessary to help ensure compliance and, if feasible, perform an audit to identify areas that might be deficient before you find yourself in the midst of a real audit by a regulator.
- Cybersecurity measures: Invest in cybersecurity measures to protect your business from cyber threats. This can include simple steps like firewalls, antivirus software, and employee training on cybersecurity best practices.
- Legal support: Consider hiring a lawyer to help you with legal issues as they arise. This can help you avoid costly legal mistakes that can harm your business and are a great resource when trying to navigate issues like complex regulations and compliance requirements.
As you can see, reducing hidden costs in your business requires careful analysis and attention to detail. By analyzing your processes, investing in employee training, regularly maintaining equipment, monitoring waste, staying compliant, investing in cybersecurity measures, and seeking legal support when necessary, you can help reduce the hidden costs in your business and improve your bottom line.
Measuring hidden costs in your business can be a bit tricky as they are often indirect and not easily visible. Here are some ways to measure hidden costs in your business:
- Conduct a cost analysis: A cost analysis involves breaking down all the costs associated with a particular process, product, or service. This can help you identify hidden costs that may be impacting your business.
- Analyze your financial statements: Analyze your income statements, balance sheets, and cash flow statements to identify any unexpected costs or expenses that may be impacting your business.
- Track employee turnover: Keep track of employee turnover rates and calculate the costs associated with recruiting, hiring, and training new employees.This is oftentimes a leading indicator that something is going wrong in your business.
- Monitor equipment downtime: Keep track of equipment downtime and calculate the costs associated with repairs, maintenance, and lost productivity. Match this up with maintenance performed to see if service intervals need to be adjusted to prevent future problems.
- Review customer complaints: Review customer complaints and identify any recurring issues that may be impacting your business. Addressing these issues can help reduce the costs associated with customer dissatisfaction and can be a leading or lagging indicator of problems, depending on your particular product or service.
- Track waste and inefficiencies: Keep track of waste and inefficiencies in your business processes and identify ways to reduce them. This can help reduce costs associated with wasted materials and lost productivity, and are usually ripe with “low hanging fruit” that will make immediate impacts on efficiency and/or cost reductions.
- Monitor compliance: Keep track of regulatory compliance (especially any fines or penalties) that may be impacting your business. If you are faced with a compliance violation, it’s time to bring in a consultant to fix the issues and get you back ion the right track.
In summary, measuring hidden costs in your business requires a thorough analysis of your business processes, financial statements, employee turnover rates, equipment downtime, customer complaints, waste and inefficiencies, and regulatory compliance. By monitoring these areas and identifying hidden costs, you can take steps to reduce them and improve your business’s bottom line.