Hidden Costs in SMALL BUSINESS

 

Copyright 1999 ISEOR

What are Hidden Costs? Couts visible (visible costs) and Couts caches (hidden costs). You get the point in any language. 

Dysfunctions from Socio Economic (imbalances)
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1. Absenteeism
2. Staff turnover
3. Industrial injuries
4. Low Quality 
5. Lack of productivity
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IN LONG TERM LEAD TO:
6/ Extra wages
7. Non production
8. Over time
9. Over consumption
10. Non creation of potential gain 

 

The financial cost of the delicate balance of the social and the economic (i.e. Socioeconomic) is not identified in the information systems of management (budgets, income statements, etc.), and, less still, in the countable plan, general or analytical - (Adapted from Sevall). The untapped potential linked with hidden costs and performance is due to the informal power of all those who take part in the organization and who contribute more or less to the objectives of the many shapes and sizes of retributions received in exchange for their effort. Hidden costs are also linked with low quality management due to both a lack of small business owner/manager role development and a lack of support in the face of a constantly changing business, social, and ecological environments. For more of an  accounting orientation, see various types of Hidden Costs can be found at http://web.nmsu.edu/~dboje/TDgreenconcepts.html


 

SEAM Hidden Costs (translated by Marc Hillon from French)

 

MISMATCHED COMPENSATION refers to the differential cost of assigning a worker to a task that is significantly below his ability and wage level; this same task could be properly assigned if the underlying dysfunction were corrected

DOWN TIME refers to the quantity and value of employee time required to control the effects of a dysfunction

REWORK refers to the quantity and value of the materials required to control the effects of a dysfunction

WASTE refers to the quantity and value of actual lost production or work activity due to a dysfunction

OPPORTUNITY COST refers to the value of the potential productive capacity of the business that is not being realized due to a dysfunction

RISK refers to the cumulative threat to a business’ survival caused by the constant need to sacrifice a portion of both its actual production and potential productive capacity in order to control the effects of its dysfunctions

 

NOTE: Under the SEAM protocol, a dysfunction may occur in any or all of the following areas of socio-economic performance


1. WCT Working Condition Themes
2. WOF Work Organization Frames
3. 3C's D - Communication, Coordination, Cooperation Dialogs
4. TR - Time Rhythms 
5. TC - Training Cast of  Characters
6. SP - Strategic Plots

7. SOCIO-ECONOMIC Spectacles


Understanding surface and subsurface costs lead you to an understanding of the very hidden costs areas.  This gets you to the root of the problems.

INDICATORS OF HIDDEN COSTS

ABSENTEEISM

WORK INJURIES

STAFF TURNOVER

QUALITY DEFECTS

LOWER DIRECT PRODUCTIVITY

Surface Level & visible costs
Subsurface, but partially visible costs SEAM ROOT CAUSE


1. WCT Working Condition Themes
2. WOF Work Organization Frames
3. 3C's D - Communication, Coordination, Cooperation Dialogs
4. TR - Time Rhythms 
5. TC - Training Cast of  Characters
6. SP - Strategic Plots

7. SOCIO-ECONOMIC Spectacles

HIDDEN COSTS

MISMATCHED COMPENSATION

DOWN TIME

REWORK

WASTE

OPPORTUNITY COST

RISK

Hidden Costs Level

Table Two: The items in the two green boxes are more visible costs that lead you to understand the very hidden costs in the red box. 

THINK OF HIDDEN COSTS AS A TREE WITH HIDDEN ROOTS - To represent the relationship between indicators of hidden costs, hidden costs, and the six areas of socio-economic performance, it may help to think of it as a tree or living plant: the indicators of hidden costs (which are actually visible costs) correspond to the visible above-ground part of the tree or plant; the hidden costs correspond to the non-visible parts of the plant (internal, roots, and subsurface parts); and the six areas of socio-economic performance correspond to all of the things that nurture the tree (soil, nutrients, water, sunlight, etc.) - if there is a dysfunction in any of these six "nurturing" areas, the tree will suffer. For instance, if a plant gets too much water (a dysfunction), at the hidden cost level the roots will rot, while at the visible cost level the leaves will wilt. Hope this helps - sorry I don't have a picture drawn to better illustrate the idea.--By Mark Hillon. 

What are Indicators of Hidden Costs? There are five that SEAM focuses upon. The assumption is that when Social Performance areas are out of whack, the company will experience hidden costs (some not so hidden) in each area. But the reporting system of managerial accounting most times does not track these costs of make them available for decision making. The lack of understanding of these costs leads to short-term perspective on the part of management. In this phase, the six Social Performance areas (in the qualitative report) are translated into demonstrations of accounting for costs. For example, where there is poor quality, the processes underlying that quality performance are analyzed. Audits of the Social Performance areas are conducted, and cost information is collected to show where poor quality is coming from (lack of training, poor time management, ineffective work design or organization design). Then for each accounting reports are generated to show to management, as well as to staff and workers, what it the impact of the Social on Hidden Costs. "'The hidden costs indicate the costs not located by the traditional information systems available to the company (budgets, general ledger or analytical, financial management reports...) in opposition to visible costs ... such as distributions
of personnel or purchases of raw materials" (Translated from French). 


HIDDEN COST EXAMPLE

Another: Gabriel Isaacs: How to Calculate Those Hidden Costs

HIDDEN COST

REASON

ESTIMATION

Telephone

1. Unorganized calls

Does not follow a business pattern to call people and does not keep track of time limits of cellular phone.

$204 expenses per month with a $191 variation

Telephone

2. Calls to business contacts

Contacts keep the manager on "holding" status.

A 10 minutes call is done in 30 minutes (on average).

20 minutes difference

Telephone

3. Long distance calls

Using cellular phone instead of regular phone line when trip arrangements are required / Inefficient use of phone lines.

Presents and estimate of 65%- 80% cellular phone over capacity agreement

Customer priority

Does not check customer value by profit margin per deal.

Prospect opportunity cost (13 prospects per month drop from waiting list)

Gross Margin ratio is 26% on average.

But with a standard deviation of 29%

Pricing

Inadequate profit margin selection/ Inadequate price list.

Depends on the purchased auction car.

Entertainment

Use of business money for unnecessary entertainment.

Can not be accurate calculated as not every bill had been reported.

Known examples are Casino, Music Stores, Bars and Strippers

Meals selection

Selects places to eat by personal desire (more emotional than rational selection).

Can not be accurate calculated as not every bill had been reported.

Average is $48 a month but with $30 variation

Hotels

Selecting by comfort rather than by place cost-efficiency.

Can not be accurate calculated as not every bill had been reported.

$47 a month on average with $12 variation

Transportation

Transportation selection by personal desire rather than by cost- efficiency.

Can not be accurate calculated as not every bill had been reported.

$234 average a month with a variation of $179

Insurance deal

Did not search for lower cost insurance / insurance cost per unit is high.

Can not be accurate calculated as not every bill had been reported.

$100 per auction car by using car lot insurance

Mismanagement of money

Using Credit cards, Loans and Personal funds to maintain business without gaining any profit.

$3,000 interest payment per month

Lack of comprehension of business financial papers

COGS and expenses are confused and mixed.

______________________

 

As the hidden costs accumulate and the Social Performance system gets more out of whack, there are bottom line issues of a financial consideration. This gets us to the more strategic and policy levels of the firm (See Figure Four). In other words, to really do something significant about hidden costs it is necessary to change strategies, policies and the very rules of the game.  We now construct a Hidden Cost/Hidden Revenue calculation based upon the Root Cause and Effect analysis:

 

 

Figure Four: "Three Dimensions of SEAM"

What SEAM does is slowly build the SMALL BUSINESS management tools (from developing internal and external strategic plans such as SWOT), priority action plans to implement changes, building strategic indicators (so the head is not in the sand), building skills, including time-sharing/time management, and renegotiating the contract with labor, consultants, suppliers, and community.

The second dimension (process of improvement is also built over time).  That is through diagnosis, the hidden costs become more visible (we see below the water line), projects get implemented to bring about a better balance of Social and Economic (Socio Economic Analysis of Management), and the results get evaluated.

But, these first two dimensions mean nothing at all unless the the third dimension is also tended to at the same time (Political and Strategic Decisions).  Strategy has to be implemented politically. This can mean changing the rules of the game (new forms of compensation, contracting, and new values and mental maps). Policies about how the Small Business deploys its limited resources, including HR get worked out.  And it all takes the commitment of top management of the Small Business.  As a general once told me. There is usual a bottleneck in any division, and it is usually at the neck of the bottle, "pointing to himself."

The reason why most small businesses never see BIG RESULTS is because they only SEE what is above the WATER LINE.  Think of an ICE BERG. You see what is above the water line, but not what is below.  And we can add the reason they never fix the leaks below the water line is that the three dimensions of Change in Figure Four are not being worked out with an attention to managing the hidden costs during the implementation.

ADDITIONAL RESOURCES

  1. There is a printable Diagnostic for SEAM (press here).

  2. Hidden Costs study guide be found at http://web.nmsu.edu/~dboje/TDgreenconcepts.html  

  3. Hidden Cost Power Point presentations in Spanish and English at http://www.horseSenseAtWork.com/emec/ 

  4. Gabriel Isaacs: How to Calculate Those Hidden Costs


Copyright 1999 ISEOR
All rights reserved on each schemas and texts