Spending money is an art, full of learning, both for personal life and for businesses. Although frugality is a virtue, in the process of operating a company, cost savings are an important consideration, but improper savings can save disasters, and good intentions may bring terrible consequences. So, how to judge the necessity of savings in business operations? How should companies spend money in a relaxed manner?
Su Xijia, emeritus professor of accounting at CEIBS, discussed the doorway behind the fact that enterprises spend money and save money in this issue of "Su's Ramblings". In Professor Su's view, the purpose of business operation is to create value, not to reduce costs. Businesses that save money in inappropriate places can outweigh the losses. Only by crossing the "one acre and three points of land" and paying attention to the fundamental interests and values of the company can we make correct decisions.
In July 2021, the new crown epidemic that had been silent in China for a long time suddenly broke out from Nanjing Airport and spread all the way to Yangzhou, Zhengzhou, Zhangjiajie and other places, causing the pressure on prevention and control in various places to increase sharply. Epidemiological investigations have found that the outbreak at Nanjing Airport was caused by changes in cleaning and freight processes at Lukou International Airport: property cleaning outsourcing and unified mixed operation of domestic and foreign flights. The decision to make this change was made by the chairman of the Eastern Airport Group, which was intended to improve operational efficiency and reduce costs. But he probably never dreamed that saving money would save a big disaster, and that a beautiful intention would bring terrible results.
Lao Gan Ma provides another example of saving money more than it is worth the loss.
In 2018, the market came out with the news that Lao Gan Ma changed the ingredients of the hot sauce after the founder Tao Huabi quit the daily operation and was succeeded by her son, and the original Guizhou pepper was replaced by a cheaper Henan pepper. According to a dealer, "Guizhou peppers are the best in the country, the price is basically maintained at 12-13 yuan / catty, Henan pepper price is 7 yuan / catty." Lao Gan Mama uses 13,000 tons of peppers a year, so after they became well-known, they began to slowly reduce Guizhou peppers and continuously increase the amount of peppers in other places until 2011, when Guizhou peppers were completely eliminated. Consumers generally can't eat it, only those who make chili peppers know."
Although consumers can't eat it, the disappointment and dissatisfaction after learning the inside story are obvious. The damage to the lao ganma brand by the replacement of the pepper incident is probably far more than the cost savings.
The purpose of doing business is to make money, but what management is doing every day is spending money. Spending money is the foreshadowing of making money, and making money is the result of spending money. Spend the same amount of money, and the results can vary dramatically. In this sense, spending money is art, and spending money is learned.
The purpose of business operation is to create value, not to reduce costs. Blindly reducing costs is likely to fall into a dilemma similar to Nanjing Airport and Lao Ganma.
The reason why saving money may not be worth the loss is because the various types of costs and expenses have different nature.
Roughly speaking, costs and expenses can be divided into two categories: value creation and consumption. For value creation expenses, not spending money is not doing things, typical examples such as equipment maintenance and channel development. The cost of consumption must be greatly reduced, and experience proves that the cost of consumption will always have room to be reduced. Someone made a very graphic analogy: the cost is like a person's fingernails, and you have to cut it from time to time, but you will be very uncomfortable if you cut your head.
It can be said that the most concerned expenses in the market are research and development and marketing. Because these two types of expenses represent the future growth potential of the enterprise to a considerable extent. Expenditures on R&D and marketing expenses generally do not help the income of the current period, and their role is mainly reflected in the future. It is conceivable that a management that only cares about the performance of the current period is not willing to spend a lot of money on these two projects. What's more, the future benefits of these two costs are highly uncertain and are high-risk inputs.
A more interesting example is that in 2008, someone made a ranking of the proportion of R&D investment in sales revenue of world-famous multinational companies, Nokia ranked eighth, and Apple ranked eighth. Another list in the same year ranked by innovation ability, Apple ranked first, and Nokia fell to an insignificant position. It can be seen that R&D investment does not ensure the establishment of innovation capabilities.
From my experience and observation, companies that focus on R&D and companies that like to invest heavily in marketing will change in their cultural temperament.
Typically, such as Harbin Pharmaceutical No. 6 Factory, advertising is overwhelming, but there is little investment in research and development. The result is that the company sells only calcium tablets and vitamins, and of course the market is big enough for many companies to survive.
The ills of China's pharmaceutical companies, which emphasize marketing over research and development, have been widely criticized for many years but have rarely improved. A 2020 study by Huang Shizhong and Li Shi, professors of accounting at Xiamen National Accounting Institute, showed that the total R&D expenses of 330 A-share pharmaceutical and health care listed companies in China in 2019 were only equivalent to 55% of the R&D expenses of a Us Johnson & Johnson company. The sales expenses of the well-known pharmaceutical company Hengrui Pharmaceutical in 2019 reached 8.525 billion yuan, which was higher than the sum of its operating costs, management expenses and research and development expenses. The biggest expense in sales expenses was academic promotion activities, which were held 242,900 times a year, an average of 665 per day, which was incredible.
It is slightly gratifying that China's pharmaceutical companies are catching up and increasing investment in research and development, and in time, there will be achievements that will be admired by the world.
If marketing and R&D expenses are good expenses for future growth, fines are the most typical bad expenses. Not to mention the consumption of resources, it also has a negative impact on the company's image.
In my opinion, the biggest harm to enterprises is the cost of inventory caused by over-procurement and over-production. Enterprises often covet price concessions and one-time over-purchase, on the surface, it seems that the cost has been saved, in fact, the subsequent loss caused by inventory backlog will almost invariably cause a heart-wrenching price to the enterprise.
However, many people in the enterprise will want to over-purchase out of the interests of the department: the purchasing department will reduce the unit procurement cost, and the performance will be significantly improved; the production department will also welcome over-procurement, the production cost can be reduced, and the performance will be boosted; and even the sales department will agree to do so because the sales price may decline with the cost reduction, and the sales indicator is easy to complete. The cost of improving the performance of the department is the damage to the overall interests of the company, which deserves our vigilance.
The cost of redundancy, which has a limited direct impact on costs but is deeply damaging to corporate culture and morale. Where the redundancy is abundant, there must be non-continuous and complaining. What else can an idle and energetic person do without looking for right or wrong? Redundant companies often make it difficult for people who are active to work, and over time they will definitely suppress the morale of the enterprise. However, as a redundant person, he can still settle down in the enterprise, either he is meritorious in the front, or he is strong in the background, and the average person can't help him.
The expenses that have the greatest potential impact are hidden expenses, such as the cost of inventory funds. Imagine that two products are completed and put into storage, the same unit cost, sold at the same unit price, but one is sold on the same day as the warehouse, and the other is sold after three months. Judging from the financial statement data, the sales profit of the two products is exactly the same. But common sense tells us that every day that the second product lies in the warehouse consumes the company's precious funds, and the cost of capital is very expensive. One of the reasons why the performance of many companies is that the inexplicable occupation of various types of assets drags down the efficiency of asset use, thereby reducing the profit margin of assets. In this sense, reducing occupancy is creating value.
Once, an executive said to the boss: You spent so much money training managers, after three years they are going to leave, what do you do? The boss replied: You can't think like that! You should think: What if I don't train them, and they won't leave me after three years? This is the difference between part-time work thinking and boss thinking. The priority given to part-time thinking decision-making is the KPI of oneself or one's department, one's own or one's own or department's performance. And the focus of the boss's consideration is on the value of the company, the root of the company.
I think that the first cultivation of being an executive is to abandon the thinking of part-time work and establish the thinking of the boss. When encountering problems, we must strive to cross the "one acre and three points of land" in front of our eyes, and think and make decisions from the fundamental interests of the company and the value creation of the company. Otherwise, it is not enough to improve their own pattern and realm, and the control of costs and expenses is regarded as such, and managers cannot ignore it.
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