As fall approaches each year, it triggers our strategic thinking about our company goals for the next year and how we will achieve them as an organization. I am sure if you are taking valuable time to read this, you also have the foresight to plan, budget, and execute a Profit & Loss Statement.
Most businesses that operate today compete primarily on their unit cost structure. Their adjusted gross profit is the difference between the cost of goods and services and the delivered price for the product or service. The lower your unit cost structure, the higher your profit margin—or the more competitive your price or service—allowing you to grow market share.
Simple concept, yet we still find an unrelenting focus on top-line growth (sales/revenue) coupled with penny-wise, dollar-foolish cost cutting. Generally, the companies that consistently dominate their respective marketplaces do so by strategically cutting costs and investing in strategies that ultimately lower their cost of doing business long term.
In over 23 years of consulting with businesses of all sizes, one of the most common mistakes we have seen is the perspective that insurance is a costly expense that is only managed by shopping around to get the best price. If you are one of these folks, you are not alone, as this is how the overwhelming majority of businesses attack their insurance conundrum. That’s actually great news for you.
As the New Year approaches, our suggestion is to look at insurance as a smaller component of an overall risk reduction strategy that will substantially lower costs across your Profit & Loss (“P&L”) Statement, year in and year out. What number would you rather have—a 10 percent reduction in your insurance premium, which fluctuates up and down each year, or a consistent, sustainable three points in your profit margin?
In order to tackle any problem, we must first identify and assess the challenge before beginning to formulate a strategy that is consistent with your overall goal, which is to lower your unit cost in perpetuity.
Best-practice organizations put insurance into a much larger bucket called “Risk Cost Components.” They realize that by identifying, labeling, and measuring cost variables associated with loss, they can begin to strategically and systematically address the challenges associated with those cost items.
These organizations understand that the price they pay on their insurance program is a function of how well they manage their losses. We often get called into meetings where the number one complaint is that insurance costs have risen dramatically, killing the profits of the company. We simply explain that high insurance premiums are a symptom of the original disease, their claims and losses, which drive premiums.
Once a full-on evaluation is done, we reveal to these folks that the high insurance premiums are only one “loss” component that is killing their P&L. When it’s demonstrated that 80 percent of their losses are outside the cost of insurance premiums, we have their attention. The next step in assembling a formal strategy is to return them to profitability, ultimately taking them to a place of excellence.
This is no small endeavor. Frankly, it’s hard work, which is where you have an opportunity, because most folks tend to opt out and take the easy road. Those that commit to a longer-term view and strategy are ultimately rewarded by the marketplace. Your profits will increase substantially, which means you can actually make more money doing less work, or grow market share.
It’s our view that there’s some heavy lifting up front, as this strategy requires a commitment and investment. However, once on the other side, it’s so much easier than dealing with four brokers every renewal season trying to figure out which proposal to bind 24 hours before the insurance expires.
Most agree that insurance renewals are painful; it doesn’t have to be that way. In fact, our position is that if you adopt a risk reduction strategy, your business and personal life will be greatly improved due to the reduction in stress AND costs.
