THE TRUE COST OF PREVENTABLE ERRORS:

A New Perspective on the Cost of Errors

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Consider the effect on profitability when someone works unnecessary overtime, drives a company vehicle a few unnecessary miles, fails to collect an overdue account, subscribes to unused journal subscriptions or needlessly pays too much for supplies. The impact of an undesirable action is much more than the additional dollar cost of that action. Any decision which leads to additional work or additional costs that does not add value in the minds of your customers, or is not required by law, should be scrutinized.

The added cost of these actions should be viewed in terms of the additional revenue needed to pay for the cost.

For example, if the cost of the action is $100, and the company’s net profit after all variable costs is 18%, then the sales dollars required to break even on the added cost is $556. If we assume that all costs are variable for the company over a given revenue range, the impact of an unnecessary action is even more dramatic. For example, if the net profit is 3%, then the sales dollars required to cover an additional $100 cost is $3,333. You could do all the work necessary to sell an additional $3,333 of products and make absolutely nothing.

Most business owners have never looked at cost from this perspective. Using this perspective as a tool in analyzing costs will assist businesses in improving systems to ensure that preventable errors are minimized.

For more ideas on maximizing your bottom line, please contact Kim Gregoris, member of the Berntson Porter Profit Enhancement Team at (425) 454-7990.