Moving Words – Cost Analysis

Timothy Brady

“The only utility is that which people are willing to pay for.” Jules Dupuit (developer of the Cost Benefit
Analysis)

We’ve all heard “When the going gets tough, the tough get going.” But in the world of Moving, this seems to always be the case. Moving and storage is a challenging business with so many unpredictable events or costs facing us each mile our trucks roll. So another idiom comes to mind, telling us to control the things
we can while letting go of the things we can’t. We can’t control the weather, road construction, or a number of other outside events. There are numerous things we can control, but like anything in life, this sometimes requires making some tough decisions. One of the most challenging and hardest tasks to undertake is the ‘Line Item Cost Analysis.’

What exactly is a ‘Line Item Cost Analysis’? It’s a process of evaluating every single cost related to running your business. It requires careful scrutiny of the value the item or service provides your business, and determines how the expensed item affects, in a positive or a negative way, the activities your operation must perform in the course of doing business. Too many businesses will take the cost-cutting knife and just start chopping and dicing expenses left and right without evaluating the overall effect these reductions or eliminations have on the entire operation. In many cases, reducing or eliminating an expense does decrease the company’s Break-Even Point; however, sometimes abolishing an expense actually causes other costs to inflate, thus increasing the company’s Break-Even Point. It becomes necessary to evaluate the net effect of any cut or reduction across your entire business. What is the result of the action to the overall efficiency and profitability of your operation? In other words, just because it reduces costs doesn’t mean it will increase profitability. As a drastic example, if a trucking company were to eliminate all fuel costs, it would have gotten rid of one of its highest expenses, but it also would have made it impossible to service its shippers as the trucks sat parked. You must choose where the ax falls – wisely.

Here are the tough questions you need to ask as you evaluate each expense required to run your operation.

First, you need to determine what will happen if you eliminate an expense altogether:

1. How necessary is the item, service or person?
2. What would happen if the item, service or person were eliminated altogether?
   1. Would it lower or improve customer service? 
   2. How would it affect overall efficiency? 
   3. Would something or someone else have to replace or fill the void left by eliminating this cost?
3. Would eliminating the expense cause other costs to increase or decrease?
   1. By how much?
4. What is the net cost increase or savings after completing the elimination?

By studying the entire picture of what happens when you do away with any cost, you are able to see a wider range of the effects of your action. You must spend money to make money; we’ve heard this most of our lives. But it’s how wisely and carefully you invest those dollars into the cost of doing business that
will determine your level of success. A particular law of physics applies here: for every action, there is an opposite reaction. Most costs don’t exist in a void, so for every expense cut there is a cost or time requirement needed to fill the void.

Example: You lay off your only dispatcher to save the cost of his or her salary. But now, because your operation can’t run without someone dispatching your trucks, either you or someone else in the office has to perform the dispatching duties along with the other tasks you are required to do. The reduction of this expense looks good on the Profit/Loss statement. But what is the actual result in the overall operation? If your current tasks require you to monitor your current customers, farm for new ones, do the bookkeeping and be the paymaster, how are those jobs affected by adding dispatching duties to your list of  responsibilities? So, both increases and decreases in costs and time must be evaluated.

If in eliminating the expense, your analysis indicates an increase in the company’s Break-Even Point, then the next evaluation looks at reducing rather than eliminating the expense. Will this decrease be effective in obtaining the necessary cost savings?

Here are the questions needed to determine what will happen if you reduce the expense instead of getting rid of it:

1. At what level is the item, service or person necessary?
2. What would happen if the cost of the item, service or person is reduced?
   1. Would it lower or improve customer service?
   2. How would it effect overall efficiency?
   3. Would something or someone else have to replace or fill the void
      left by this cost reduction?
3. Would the cost reduction cause other costs to increase or decrease?
4. By how much?
5. What is the net cost increase or savings after completing the cost reduction?

Again using the example of the dispatcher, you would look at the net effect of reducing the hours and pay of the dispatcher (rather than laying him off). Measure the results by answering the questions in the second list concerning reduction of an expense.

I have found after doing repeated line item cost analysis, most large expenses like personnel, fuel, and vehicle maintenance and repair are the expenses that, if cut, will cause the biggest increase in other costs, thus negating any real savings. It’s usually the culmination of the reduction or elimination of the small costs that actually add up to the greatest net savings. Now don’t misunderstand; the controlling of costs in all areas is vitally important, especially in the large expense areas mentioned above. But constantly checking to see if there’s a cash drip coming from your cash flow faucet is one way to be sure your hard-earned cash isn’t going down the drain.“The price of every thing rises and falls from time to time and place to place; and with every such change the purchasing power of money changes so far as that thing goes.” – Alfred Marshall