The finances of a company can be roughly summarized according to budgetary principles known to all; one column for expenses, another for income. By subtracting the first from the second, the company is either profitable or not.
On the other hand, there are other costs that insidiously affect the company, invisible to accounting analyses.
Where do these hidden costs originate and how do they affect the company’s financial and operational resources? How can they be detected effectively, in order to be properly addressed?
The authors focus here on the hidden costs which stem from the company’s activities and structuring choices. They will try to break down the parameters that make it possible to identify these costs and make a clear distinction between these and the company’s actual expenses.
Define the intangible
Take the example of the creation of a department within a company; an employee occupying a specific role is overwhelmed by the volume of tasks assigned to him, precipitating the hiring of assistants just to be able to process the additional demand. The company continues to grow and assistants are added as these tasks accumulate, leading external observers to believe that the department in question is growing, thanks to a dazzling boost of productivity.
On the other hand, sooner or later, any company facing the realities of the market will have to review its way of doing things, even going so far as to have to re-calibrate its entire structure in order to simply survive. When this scenario occurs, a mapping of tasks and employees is often the best solution, allowing a thorough analysis of each department and the development of a clear action plan.
It is at this point that the hidden costs will be revealed.
In the end, all the positions which were added without long-term planning do not have any justifiable purpose. Such a dissemination of tasks practically ensures operational chaos within the department, often leading to some duplication of tasks and uncertainty about the responsibilities and boundaries of each position. Worse still, this reactionary attitude often prevents the development of real expertise, a complex problem that can be very costly when trying to solve it in a hurried manner.
The company has probably never asked itself any questions about the role of the department in the context of its business strategy, which should, in theory, be the force guiding the recruitment and implementation of new departments. What form would the ideal department take in five years’ time? Does the achievement of such a goal imply a complete overhaul of the department and layoffs in addition to having to acquire expertise that the company does not currently possess?
Behind each of these answers are additional disbursements that suddenly take on a very concrete aspect within the company’s finances; the company, assuming that it wants to move forward, cannot afford to ignore them.
The excess resources, the ones we do not have and all the tasks that the company cannot accomplish within its current structure represent potential and, above all, unavoidable investments.
Resources will have to be acquired or reduced, as the case may be, resulting in costs. Any change at the structural level represents a readjustment cost, the accumulated delay compared to better referred competitors will also have to be made up with the help of business strategies that will still generate costs, whether in terms of marketing, hiring or strategic acquisitions.
Any redundancy represents a loss of efficiency, easily translated into losses; its elimination will lead either to a redesign of the position with possible salary adjustments or its abolition, which could lead to layoffs.
In short, in order to correct the situation, the company will have to reorganize its workforce, generating unexpected additional costs.
The inter-connectivity of the various departments that make up the company should, in the best of all worlds, be exploited, ensuring a logical division of labour that will allow optimal efficiency to be achieved.
From the outside, such a change of course is likely to be perceived negatively; when a company undertakes a sudden mass layoff, managers are often blamed and the reality of the situation pushed back to the outside world.
All these hidden costs are the result of poor upstream work; planning the very structure of a company cannot be done in a reactionary way, otherwise all the worst-case scenarios imaginable will become concrete too quickly, representing real expenses.
It is worth recalling that although the best plans can fail when they reach the execution stage, when the company is built on a solid foundation, the response to such failure will be faster, more precise, more focused; a simple turnaround and not an exhaustive re-engineering.
Certainly, some expenses will be necessary in order to correct the situation, but they are infinitely less costly than a complete overhaul. In addition, a complete overhaul could negatively affect the company’s public image, as mass layoffs often have bad press.
Knowing the existence and possible repercussions of such costs, the company thus enlightened will be able to put one foot in front of the other on the road to success; Prevention is better than cure.