What Are Hidden Costs Costing You?

The key to successful business is managing sales and profits effectively. Sometimes we look at the numbers and miss some significant information that prevents us from maximizing financial performance.

This episode of Books & The Biz digs into hidden costs and where to find them. Join us and be sure to Like, Share, and Subscribe!

[00:00:10.14] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltri Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:45.03] - Dan Paulson

Hello, and welcome to Books and the Biz. Rich, how are you doing?

[00:00:49.29] - Rich Veltre

I'm okay.

[00:00:51.21] - Dan Paulson

He's okay. Docusign is evil. We'll just... Evil. Is that our new subject for today? Docusign is evil.

[00:01:00.09] - Rich Veltre

Docusign is evil.

[00:01:01.21] - Dan Paulson

Rich's computer.

[00:01:03.29] - Rich Veltre

Drove me torture. I'm tortured by DocuSign. So someone come and save me.

[00:01:10.15] - Dan Paulson

We'll see if we can do that today. So we're going to talk about costs today. Well, what's the hidden costs of DocuSign not working? Tell me.

[00:01:20.21] - Rich Veltre

Well, that means that I couldn't get somebody to sign something they had to sign to get something out so that they can get billed and pay me.

[00:01:30.13] - Dan Paulson

There you go. It's delayed gratification of payment, which is very important.

[00:01:37.05] - Rich Veltre

Absolutely.

[00:01:39.10] - Dan Paulson

Well, we should probably touch on a little of today's news because, of course, now it's fun just talking about news every day, since there's always something changing. Terrace went into effect on Tuesday, which relates to our subject today. As of today, it sounds like half of them got rolled back. Apparently, that didn't make anybody happy.

[00:01:59.29] - Rich Veltre

Did it make it 24 hours? I don't think it made it 24 hours.

[00:02:04.25] - Dan Paulson

I think some China stuff is still in place. I think some Canada stuff still in place. It sounds like most of the Mexico stuff has been rolled back for 30 days. And this follows up from the auto makers demanding that they get their terrace roll back for 30 days, and that all happened yesterday. So fun stuff, fun stuff. So So that all does tie into what we're talking about today, because there are the costs you can control, there are costs you can't. And when we were talking the other day, to me, one of the issues that I think businesses need to be aware of and start addressing are the hidden costs. So I'm counting you to approach where are those hidden costs on the financial side, and I'm going to talk about some of them on the operations side. And People, if you're wondering what we mean by hidden costs, actually, Rich, I have an example. I did not send this to you, but I'm going to pull this up on screen because I think it is relevant to our conversation right now. And it also ties into some of the stuff related to XCXO that we talk about, but this is off the Wall Street Journal.

[00:03:20.14] - Dan Paulson

Starbucks CEO tells workers to step it up after layoffs. Translation is you are coming into the office whether you like it or not. And A lot of that is tied into greater accountability. So the culture over at Starbucks, they have not figured out how doing remote work, how they can maintain that culture and also hold people accountable to the metrics that they are set up for. And why do I say this is a hidden cost? Well, if your company is struggling, and right now, believe it or not, Starbucks with their 150,000 locations everywhere, appears to be having some issues. Is anything you can't do to track accountability or performance is a hidden cost, because you don't know how well you're performing or not. And so that's a lot of what we're going to be talking about today. Rich. Yes. So from your perspective, when somebody is looking at the books, and I'm probably just as guilty as this as anybody, because I am not an accountant. I know enough to be dangerous, and then I talk to people like you who educate me on all the stuff I missed, What are some things that maybe companies aren't looking at as closely from the numbers side of things, from the actual financials that they need to pay more attention to that would really impact their business?

[00:04:44.17] - Rich Veltre

Well, I think there's a couple of things that I just want to throw out there. I think, first off, I'm going to make a very blanket statement that you should be looking at your books, period, right? That's the end of it.

[00:05:02.02] - Dan Paulson

That might be the first hidden cost. Look at your books more than twice a year.

[00:05:05.22] - Rich Veltre

Those would be really hidden costs. Yeah, that you just have no idea what's actually in them because you're not looking at them. So if you're not looking at numbers, start looking at the numbers. The numbers don't lie. All right? People can stand up there and tell you all kinds of stuff, and you can decide whether they're lying or not. The numbers just don't lie. If you spent three dollars, guess what? You spent three dollars, period. There's There's no arguing. There's no special presentation I can do. You spent three dollars. So if you're not looking, take a look, because that's part of, I think, what the problem is. This week alone, I've had more conversations with people, and I've just asked a general basic question, how's the business doing? And I get answers. Run the gamut on what the answers are that I get back. But take a look at the numbers, because when I look at the numbers, I start seeing things differently than you do. And so I tell people, look, if you haven't looked at your numbers, look at them, and then we'll ask you the question again. But you need to be able to look at your numbers and see how you're doing.

[00:06:17.07] - Rich Veltre

And then dig in a little bit. Only you know the business. You know business better than I can ever know it. If you're the founder, if you run it, if you're in it every day, you're going to know it better I do. I know from a lot of experience what questions to ask and where to look, but it doesn't mean I know the business better than you do. So I tell you to take a look, make sure you know what's going on in your business, look at your numbers, and make sure that the numbers are telling you what you think you know about the business, because if they're telling you a different story, time spend a little bit more time. So Starbucks, I believe that article, the CEO is fairly new.

[00:07:01.17] - Dan Paulson

Correct. I think within the last couple of months.

[00:07:04.29] - Rich Veltre

Yeah, I think he was a Chipotle guy or something. He was with another chain, and they brought him in for specifically that reason. And I think that's why you're going to see more articles like that. It's a little bit of a once I see a problem, I'm going to let you know there's the problem and we have to fix that. Now, Starbucks has retail locations. So the work from home thing, it's not at that level. He's not complaining the store level, although they're showing you a picture of a store location. He's probably talking about headquarters in Seattle. So reading between the lines, he sees something going on with the company culture up in his headquarters, and he's making it known.

[00:07:48.16] - Dan Paulson

Well, I would guess that, as you point out, yeah, it's not the store level because it's hard for a barista to make coffee at home and then for somebody to pick it up at the drive-through. But at the corporate level, what I perceive happening here is there are checks and balances in place on what work's getting done. And I'm sure to your point, he's looking at the numbers going, something's not adding up here. Our costs are going up, maybe our quality is going down. We're definitely losing clients because coffee has gotten a lot more expensive. I don't know if you've shopped at Starbucks lately. My daughter loves Starbucks. When I go to see her to get my hair cut, it's usually cost me an extra seven to eight dollars for her mocha latte, whatever that's loaded up with sugar that I got to pick up for. So I imagine that people are making that choice that I can go to the convenience store, I can get a cup of coffee and load it up how I want for probably two bucks, three bucks, compared to seven or eight. So they're making a choice to move on.

[00:08:51.29] - Dan Paulson

And the thing I do notice about culture, we talk a lot about remote work, and I still believe remote work is going to be a strong force going forward. And I also believe that there has to be some FaceTime for a regular employee to be in that office, to build the culture, and communicate, and create teamwork, and just do things that you can't do over a Zoom call. But I think where the hidden costs are here, and I want to touch on some things financially, because there's also questions I get asked financially that I think are hidden costs that people don't realize. But as we finish up story with the Starbucks thing, I believe because people are working at home, they work at a different pace. I believe their managers are probably not taught how to coach people from a distance, and make sure that they're hitting certain metrics or even if certain metrics are set up, because a lot of this article talked about accountability. To me, that was a big thing. And as I'm busy writing my next book and talking about accountability, that to me seems to be one of the largest issues that most companies face is if there's no accountability, that leads to lower quality, it leads to more mistakes, it leads to slower work times, it leads to a number of things which most people don't look at as costs until they show up on your numbers.

[00:10:16.16] - Dan Paulson

And by the time they show up on your numbers, it's too late. That's money already spent. Now to circle back to, let's stick on the financials for a minute here. I often get asked when we're going through the PnLs, and we look at it and somebody's talked about their books and whether they're doing really well or whether they're doing okay or whether they're not doing well at all. Well, I don't have that money in my bank account. So I might be profitable $100,000. I don't have $100,000 sitting in my bank account. So another hidden cost that I believe most people don't understand really well is the fact that you're looking at something from a PnL side versus a tax side, And you accountants like to take something that if I spent a half million dollars on a building, for example, I can't take that right off in that year that I bought that building. I take depreciation and amortization. And that impacts those numbers as well. Can you talk more about that?

[00:11:21.17] - Rich Veltre

Sure. The thing that you have to put, I always talk about wearing a different hat, right? Today, I'm I'm telling my accountant hat that is the storyteller hat. Okay? Right. And if we're sitting down to go over your numbers, the numbers are telling you a story. And you may interpret them one way, and I may interpret them another way. And we meet in the middle and say, well, this is what the story actually is telling us. Okay? So your numbers that you're using for running the business are telling you a story. The numbers that you're using to tell the IRS or the state what you've done. So this is what taxes You owe, that's telling a story. So the depreciation part of it is all buildings have a life. They have a useful life. So if it's residential, it's 27 and a half years for tax purposes. If it's commercial, it's 39.

[00:12:20.05] - Dan Paulson

We won't hold you to it, even though you're the accountant guy.

[00:12:24.19] - Rich Veltre

If it's commercial, it's 39 years. So You get to take what you bought the building for and write it off over 39 years or over 27 and a half years. It's just a write off of the cost that you've already spent in buying the building. It adds to the fact that what it's supposed to do is relay the fact that over time, the building will require more maintenance, more attention. And so you're going to have to spend money on that. So the government has already built in some write down of the value of the building to allow you some additional help in going ahead and maintaining that building. So it's just a natural cause of things the way they go through. I think the other thing to think about is the fact that if we go back to the Starbucks example for a minute, there are things that if you're just a worker and you're just a barista and you're just making the drinks, right? You may not be thinking about things, but as you make a drink wrong, if you do it incorrectly, you have to do it again, because their mantra is that you're going to make that customer happy.

[00:13:46.09] - Rich Veltre

So you make them another drink. What do you do with the first one? It's probably gone, or it's garbage, or you give it to the customer and say, you're only paying for the one, but if you want to try this other one that's off, you can have as well. That's a waste. That's a hidden cost. So you have another cup that went out the door. You have another straw, if you're not in New Jersey, you have another straw that went out the door. Okay?

[00:14:18.05] - Dan Paulson

You can ask for it here in Madison, too. Don't worry.

[00:14:21.00] - Rich Veltre

Okay. So the ingredients, right? The ingredients, the cup, the cost, the time that you took to do that, although it's probably by the time you actually add it up. If you did five different drinks that day, it adds up to waste. So when you hear people talk about, I'm managing by the numbers, these are the kinds of numbers that they're looking at. Because they'll get to the end of the day and we'll say, okay, our inventory is now out the door. Here's how much we spent on that inventory. We made this many drinks. Here's our average number of drink costs, or here's the average profit on the drinks. And they'll They'll start to see that that number might be coming down. So what that tells them is the quality is probably coming down, or there's mistakes being made, and those things are going out the window. And if you're not looking at your numbers, if you're not... I Look, you don't have to be so stringent that you're sitting there saying, well, we spent one extra drink. That might be too much. But if it's happening all the time, it'll show up in your numbers.

[00:15:27.01] - Dan Paulson

Okay? Yeah. If it's happening 10 % a day for example, that you've just increased your food costs by 10 %. Not to mention you've also increased your labor costs because as you pointed out, not only did they make the first cup, they had to make the second cup. And I would say there's even another There's a big cost on top of that, which is the ones that don't get caught, that go to the customer, upset the customer, and they never return. Now, you don't get that return sale. You might have saved because you didn't have the loss on the food costs, but now that customer is not spending more money with you. And sometimes these customers, they come every week, they come every day, whatever. Now they're going somewhere else. You lose out on that.

[00:16:10.20] - Rich Veltre

And now somebody like Starbucks, you take it and you say, well, that was my location, right? Now you say there's 150,000 locations as the number you threw. I don't know if it's right.

[00:16:21.15] - Dan Paulson

I didn't check it. It just seems like there's one on every corner.

[00:16:25.08] - Rich Veltre

New York City, that's where they started, right? I think New York City was every point. Practically, Basically, every corner. They were everywhere. So now I added up. We were just talking about one location. Now, put it across every location. So by the time the CEO gets a number, he might be getting them regionally He might be getting them in a certain way that's somewhat summarized. But he's going to look at it and go, 150,000 location, not one of them is profitable. That's a problem and a half. These are the types of things. If it's a big enough issue, then it winds up landing in the numbers, and it gets accumulated up to the point where the CEO is looking at it going, if I improve this by 5 %, I make my bonus. He can look at it and simply sit there. At that point, 5 % might be a massive amount of money. When you add up 150,000 locations across a 5 % improvement, that's a win for the shareholders. So when you're talking at a big company like that that's got a public presence and a public stockholdership, you have to consider that.

[00:17:40.06] - Rich Veltre

That's part of the motivation of what people are that are running this company. Not the college kid that you hired to make the drink on a Saturday afternoon because that's his part-time job. But he's the one who's potentially part of the problem. And you have to find a way in your hidden cost, you have to find your way all the back to that teenager.

[00:18:03.02] - Dan Paulson

Yeah, well, let's talk about employment, because I think that is another big hidden cost that most business owners don't really look at as closely. We've talked constantly about how difficult it is to hire right now. And I think it's true in pretty much any organization in any position, especially the skilled or experienced ones, it's becoming even more difficult because, again, we have a great deal of people retiring now that are leaving the workforce. But that hidden cost of turnover to me is huge because I don't know what numbers you pulled together for the cost of hiring a new person, replace an old one, but Typically, the rule has been it's about two times salary. So if your average salary right now, we'll make it easy, say it's $50,000, it costs $100,000 to hire a person, replace that person, get them trained up to where we call them productive at that point. And depending upon the level of experience, that can take six months to a year to get somebody productive. That's why they're typically saying it's about a two times ratio over the salary. If you have high turnover, in other words, you're constantly churning people, your hidden costs are in that turnover, because now every person that you're replacing, again, multiply that times two, multiply that times however many people you're replacing in that position over the year or years, it gets really expensive really quick.

[00:19:36.01] - Dan Paulson

And to me, this is where everything ties back to leadership, whether it's the number side or whether it's the operations side. If you don't have that core leadership in place, doing the right things, doing their best to keep the employees happy, well-trained, functional, making their jobs easier, simplifying, putting in systems and processes. Everything shows up in the books that you're talking about. And we have a colleague. He gave us a good phrase, how do you know when you're winning? Well, on the financial side, and he's a financial guy, so he's like, well, the finances are the most important. If you don't understand your financial numbers, it doesn't matter how good of a leader you are. And I would argue that if you don't understand your numbers, you're not a good leader. If you're a good leader, you do understand those numbers, and you also understand how those numbers work with everything else that's going on in your business right now. And If you can't equate where the numbers that you're looking at, Rich, equate to what's happening in the operations side, and let alone how to fix that, that's where a lot of these companies struggle.

[00:20:43.00] - Rich Veltre

Yeah, that's where that story teller thing comes from in my head, where I tell people, look, because everybody will come to me and look to me and say, well, I don't understand what's happening. I'm not really sure I can answer that question. Sometimes I can. Sometimes I can because I've already gone down that road and I've already asked the questions. But there's a lot of times that somebody will throw a financial report in front of me and tell me the answer. No, we use this and we can go figure out what's everybody else's answer. Because somebody else put that report together, not me. So if it's being thrown in front of my face, someone else wrote that, someone else came up with that story, someone's trying to tell me that story. And I know where I'm going to ask the questions, because when I look at the report, I'm going to say, well, where'd that number come from How did you come up with that? It's like I had someone that at one point was trying to convince me that they were going to submit health care claims to Medicare, and they were going to get $250 for every call.

[00:21:45.03] - Rich Veltre

And I went, there's a high likely that you're not telling me the truth. And he jumped up and down, did everything possible to tell me that, yes, it is. It's 100 % the truth. I looked it up. What? On Google? So it turned out that is where he looked. He looked on Google, and however he did it, he came up and said he's going to get 250. When actual numbers came in, he was getting 65. So problem, right? A hundred % of problem. You're getting 25 %. At best, you're going to get 25 % of what you're thinking you're going to get. Now, all the projections you put together don't make any sense. So now you have to reevaluate, and you have to go back to the people who are funding the money and say, I was wrong.

[00:22:35.08] - Dan Paulson

And they don't really like that, especially if they've already put in a bunch of money. They don't like that.

[00:22:40.04] - Rich Veltre

They don't like that. So again, it's just one example, right? I mean, these are the things It's that this is why the numbers are so important. They are telling a story. They're telling a story to someone else who will listen to you, but they want to see the numbers. And there's a reason they want to see the numbers, because they want to have something that backs That's what you're saying by a physical number, because I can't take a two and break it in half, and suddenly I have a different number that nobody knows about. A two is a two. That's it. And it's not going to hide anything either. Again, we said it before. If you spent three dollars, the story is going to say you spent three dollars. What other story do you want me to come up with?

[00:23:26.11] - Dan Paulson

Well, you do have to be careful who's pulling those numbers together and making sure those numbers are accurate. So you also have to look for where the hidden numbers are. If the numbers are telling you one thing, but it doesn't make any sense to what's actually showing up in other numbers. This is where embezelment comes in, right? And when you're doing that, how many companies face some embezelment over their lifetime, assuming they stay in business? And how many of those companies are put out of business because somebody was cooking the books and you were supposedly making all this money, but it was going into somebody else's pocket. So even though it's a put up your crosshairs again, but it's something that, again, to your point, what you started this all with, if you don't know your numbers, somebody can rob you blind. And by the time you find out you're so far underwater, you might not ever recover. So this is where it becomes important to know your numbers, know how your numbers work, know what leverage in your business make those numbers go up or down, who influences those, what checks and balances are in place.

[00:24:38.13] - Dan Paulson

All that stuff ties together. So it's never just one thing. And that's why you and I are doing this podcast, because you can be the best financial guy in the world. But if you don't understand how that works operationally, you're still dead in the water. You're in the same boat.

[00:24:55.22] - Rich Veltre

Yeah. I come across the operational stuff, and that's when I pick up the phone and Hey, Dan.

[00:25:01.02] - Dan Paulson

Hey, Dan.

[00:25:02.23] - Rich Veltre

I've been around long enough that I know when I see something that doesn't make a lot of sense. And I know that it means that I have to pick up the phone. And I'm basically telling business owner is the same thing. If you see something that doesn't make sense to you, give me a call and let's go that way, because let's go down the road of, do you need a better bookkeeper? Is your bookkeeper giving you numbers that don't make sense? Do you need better financial controls? Because usually when you hear that E-word, it's because that second one, it's not always the first one. It's not always the bookkeeper. It's you didn't have control over it. And there's ways to do that without having to have 50 people on your staff. There's ways to just check what doesn't look right. And if it doesn't look right, don't just say, I'll look at it later. If you immediately see it doesn't look right, go down the road. Go down the road and get somebody in there. And that's part of what you and I have been talking about. It doesn't necessarily have to be where I need another body in your business.

[00:26:07.04] - Rich Veltre

It might just mean we need somebody who fractionally has had this amount of time in their career, that they've seen enough places to know where to look, and that's the person you want to spend a little time with.

[00:26:20.29] - Dan Paulson

That's exactly it. And to clarify what you're saying, it's not that you don't need another person in your business. You don't need another person full-time in your business. Because I don't think most businesses can afford award to hire somebody that's going to cost them probably $250,000 by the time you add up benefits and incentives and everything else. But to have somebody in there for half of that or less, working there part time and developing your people and putting systems in place and checking the books, all those factors can make a tremendous difference on where the numbers are going. So Rich, we wrap up here. What's the best way to get a hold of you at this point?

[00:27:03.26] - Rich Veltre

Send me an email. It's rich@xcxo.net.

[00:27:09.05] - Dan Paulson

And for me, you can send me an email at dan@xcxo.net We would be happy to help you if there's any confusion or frustration going on in your business. We will let Bob take us out. But Rich, as always, a fun and interesting discussion, and hopefully somebody has learned where they need to check for those hidden costs. And if they don't, they need to contact us. Sounds good. All right. Talk to you next week.

[00:27:33.20] - Bob

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