Cost And Effect What's the real price of doing business? Dun & Bradstreet and BIZ Experiences find out in a new exclusive survey.

In the movie "Dr. No," James Bond is admiring a hugeaquarium in the archenemy's laboratory when a voice from out ofnowhere surprises him. "One million dollars, Mr. Bond,"Dr. No says, walking into the room. "You were wondering whatit cost." Bond coolly responds, "As a matter of fact, Iwas."

Small-business experts say BIZ Experiencess should be more likeBond--not necessarily employing a license to kill but being moreconcerned about costs. "Usually small-business owners thinkgrowth in sales is all they need to worry about," says WilliamF. Doescher, senior vice president at Dun & Bradstreet, aninternational research-based business information provider inMurray Hill, New Jersey. "But they might grow right out ofbusiness if they don't watch their costs."

To help small-business owners control costs, Dun &Bradstreet and BIZ Experiences surveyed 501 small businesses tofind out what they're spending on, how it's changing andwhy. The results reveal some surprises, a lot of strengths and morethan a few weaknesses in the ways BIZ Experiencess measure, understandand control their costs.

Budget Busters

What takes the biggest bite out of small-business budgets?According to the survey, compensation, taxes, sales and marketing,and employee benefits represented the highest costs forsmall-business owners. An average of 28 percent of total sales wentto compensate employees, while taxes consumed another 15 percent.Sales and marketing expenses accounted for 9 percent, and more than4 percent of revenues was devoted to employee benefits.

While these results were fairly predictable, other findings weremore surprising. For instance, BIZ Experiencess expected to lose only2.7 percent of their 1997 revenues to bad debt. Slow payers werelikewise not a problem, with more than three-quarters of customerspaying on time.

The survey broke down results by size of business and type ofownership, allowing for other surprises. For instance, women-ownedbusinesses lagged behind others in providing employee benefits,including health insurance. And while firms with 21 to 100employees led smaller firms in the use of technology,minority-owned firms were the most active of all in technologyuse.

Costs By Category

It's no surprise that employee costs are a major burden onsmall businesses. Al White, owner of a Form You 3 Weight LossCenters in Tallahassee, Florida, found it so burdensome that lastDecember, she laid off the last of her nine employees. While Whiteis now working harder as a nonemployer, she's getting more outof her business.

Other small-business owners appear to be getting more as well.Of the 28 percent of revenues devoted to employee compensation, 60percent went to pay executives. This seemingly high proportion isexplained by the responding firms' small sizes rather than byexcessive pay rates for the executives, experts say. And, alongthose lines, the percentage of revenues consumed by executive paywas smaller among larger firms, amounting to less than 38 percentof total pay for firms with more than 20 employees.

Employee compensation doesn't have to suck up all yourcapital. Employers can control costs by using incentives toencourage savings, says Tom Gillis, a management consultant andauthor of Guts & Borrowed Money (Bard Press). Pay youremployees, especially managers, a percentage of savings resultingfrom any cost-cutting ideas they come up with, Gillis suggests. Tobe most effective, the amount should equal 5 percent to 20 percentof the employee's base pay, he says.

You can also control employment costs by using temporaryworkers, who can be brought on to respond to growth and dismissedwhen not needed. Similar flexible spending approaches can beapplied to many other areas such as by outsourcing for professionalservices and using leased facilities and equipment. Thesestrategies are especially important for controlling costs in abusiness's early years, says Murray Low, director of theentrepreneurship program at Columbia University in New YorkCity.

Few BIZ Experiencess are taking this advice to heart, however: Lessthan 1 percent of sales is spent on outsourced labor, according tothe survey. And while most firms outsourced legal and accountingwork to professionals, only a minority used outside help formarketing, consulting, credit and collections, and payroll.

BIZ Experiencess should also try to use nonfinancial compensation,says Low. That may include anything from simple praise toopportunities for advancement. Knowing your employees well is key."You have to figure out what is most cost-effective to provideand in what combination," Low says.

Just as larger firms devote smaller percentages of revenues toexecutive pay, they devote more money to employee benefits. Infact, three out of 10 small companies offered no benefits toemployees. The fact that women-owned firms trailed in offeringhealth benefits can probably be explained by the fact thatwomen-owned firms tend to be service companies, which, as a group,offer fewer benefits, according to Karl Egge, an economicsprofessor at Macalester College in St. Paul, Minnesota.

Small-business owners who don't offer benefits may be losingout, however, because of their inability to attract high-qualityemployees, warns Doescher. "If prospective employees have tochoose between a job they like and one with benefits, they'llgo with the one that provides benefits," he says.

However, Doescher adds that it's not necessary forsmall-business owners to attempt to match the benefits provided bylarge employers. Instead, he says, they should aim to match whatother small businesses provide.

High-Tech Lowdown

Michael Kurela suffered a loss his first two years in business,largely because he invested in computers and other technology thatwere needed to open Penn Consulting, his one-person Pittsburghfinancial management and consulting firm.

"My costs were extremely high," Kurela recalls."I didn't want to take [on] debt to fund the business, andmy first few years were complete losses."

Like Kurela, almost 90 percent of small businesses surveyed hadcomputer equipment in their offices, and a majority also reportedhaving fax machines and copiers. But, surprisingly, expendituresfor technology, not including telecommunications, accounted foronly a fraction of 1 percent of the median annual sales of thesurveyed companies.

Why? Experts say costs for new PCs and other equipment occurinfrequently. Every two to three years, a small business adds orreplaces its PCs and other gear, spreading the purchase out overmany months.

One area where BIZ Experiencess should spend more now to save inthe long run is on information technology for gathering costinformation. Only 71 percent reported using accounting software,and even fewer use spreadsheet software.

Low says failure to gather and analyze financial data is acommon error of small businesses when it comes to understanding andcontrolling costs. "You need to have internal accounting [inplace]," he says, "so you can observe and manage your owntrends."

The Rest Of The Story

The 15 percent of sales consumed by taxes may seem high, butEgge says the survey results are in line with what largerbusinesses pay. And while you may not be able to escape taxes,there is probably plenty you can do to limit expenditures for othercosts that, while smaller, are still important.

Facilities costs amounted to a little more than 2 percent oftotal sales, but they could be even lower if BIZ Experiencess tookadvantage of just-in-time inventory practices to minimize spacerequired for inventory, says Gillis. Leasing space, practiced byjust half the small businesses surveyed, is generally preferable toowning a building or other space, stresses Low.

Sometimes low costs may indicate a problem. The very lowbad-debt ratio cited in the survey may be explained by the factthat small businesses tend to do mostly cash business, withoutextending credit to customers, says Egge. Many are retailers whooffload all risk of nonpaying customers onto bank charge cards, headds. However, low bad-debt ratios also suggest small businessesare stunting their own growth by turning away credit-worthycustomers.

According to the survey, nine out of 10 small businesses carriedsome type of insurance, but insurance costs as a whole weresmall--less than 2 percent of revenues. However, White says theinsurance savings she has realized by getting rid of all heremployees has saved her considerable money. "I've cut downon the types of insurance I carry," she says.

Experts warn that BIZ Experiencess should be cautious when decidingwhere to cut costs. The figures reported for one majorexpense--sales and marketing--may actually represent underspendingby small businesses. "Small businesses should advertisemore," says Doescher. "Some don't advertise atall." In fact, the survey results showed that one in fivesmall businesses does no advertising or promotion.

So where are they spending the 9 percent of annual sales devotedto sales and marketing? Print ads were used by most, while smallernumbers used direct mail, radio, television, telemarketing andbillboards.

Future Forecasts

This is the first survey Dun & Bradstreet has done onsmall-business costs, so it's difficult to spot any trends.However, experts identify several long-term changes in costs thatsmall businesses should be aware of.

First, Gillis says to be on the lookout for changes in the waycosts are accounted for. He points to the growing popularity ofactivity-based accounting, a way of allocating costs to specificactivities in a business, as an example of the way the accountingfield is changing its approach.

Technology is also changing the way costs are measured, saysGillis. Faster, cheaper computers and improvements indata-gathering tools such as bar codes continue to makecost-accounting faster and more accurate. "Those advances helpyou know what your costs are and how to handle them," hesays.

Another important consideration is finding new ways to whittledown the biggest overall cost category--compensation and benefits.Low predicts that outsourcing will become much more common forsmall businesses in the years ahead.

BIZ Experiencess may also want to watch for new costs that aregrowing in importance. Egge feels one of the major ones, which isbarely recognized now, will become far more significant for smallbusinesses in the near future.

"It's called opportunity cost," Egges says."It occurs when CEOs and presidents have to wear too many hatsat one time. They have to [evaluate] whether to go with computers,hire more people, buy more insurance or do more outsourcing. [Byfailing to plan ahead], they're jumping around like chickenswith their heads cut off--that's a major cost of doingbusiness."

When all is said and done, how important are costs? Too muchemphasis on cost control can hamstring a company's growth justwhen it needs it most. Too little, as Doescher warns, can cause youto grow right out of business.

About Dun & Bradstreet

Dun & Bradstreet (D&B), with the world's largestbusiness information database, tracks 47 million companiesworldwide--11 million in the United States alone. Businesses useD&B's services to find new customers and evaluate theircreditworthiness, identify potential suppliers, and collect overduereceivables.

Through face-to-face and telephone interviews and public recordssearches, more than 200 million financial transactions are added toD&B's files annually, and that's just in the UnitedStates. D&B updates its information base continually--more than960,000 times each business day.

When businesses are entered into the D&B database, they areissued D&B D-U-N-S Numbers (comparable to Social Securitynumbers for companies). Required by the U.S. government for allbusinesses in its Central Contractor Registration database and usedby the United Nations and the European Union, the D&B D-U-N-SNumber is quickly becoming the universal standard for identifyingbusinesses on the World Wide Web as well.

To have a D&B D-U-N-S Number assigned to your business freeof charge, call (800) 234-3867.

Dollars And Sense

How should you use the results of a small-business cost survey?"Benchmark your company against the survey results, and seehow you score in the various categories," suggests WilliamDoescher, senior vice president at Dun & Bradstreet. Cost datacould help you become the most efficient producer of your productor service.

That's a fine suggestion, but it's not that easy inpractice. What's typical for one company isn't for another.For best results, you need competitive intelligence. That meansfinding out the spending patterns of your direct competitors. Thenyou can try to beat them at their own game. The problem?"Competitive information is hard to get," says TomGillis, a management consultant and author of Guts &Borrowed Money (Bard Press).

Comparative shopping, pumping vendors for information and simpleobservation will help some. You may also obtain good informationfrom an industry association. For instance, many automotive tradegroups have model financial statements describing what percentageof revenues average member firms actually spend on various costs,according to Gillis.

Another caveat: Even if the survey results are from the rightindustry, cost surveys will show different results depending on theage of the company. For instance, says Murray Low, director ofentrepreneurship at Columbia University in New York City, astart-up company will spend less on fixed costs such as machineryand more on variable costs such as labor than an establishedfirm.

One thing even the most general costs survey can do is alert youto the need for good record-keeping and cost accounting so you canidentify your own costs. "If you got that one idea from thissurvey," says Doescher, "you would have spent your timewisely."

Contact Sources

Form You 3 Weight Loss Centers, 1233 N. Adams St.,Tallahassee, FL 32303, (850) 222-2311

Tom Gillis, (713) 622-2818, tsgillis@ att.net

Penn Consulting, (412) 766-3311; http://www.penncon.com