Analyzing comprehensive costs before accepting new business.
During 1990 Lubbers Resource Systems, a Grand Rapids waste-management company, grew from 300 to 1,000 customers and doubled its revenues. That should have been good news, but it produced a cash-flow catastrophe. CEO Karen Lubbers recalls, "When we signed up enough new accounts, we had to buy additional trucks and waste containers." Because margins are tight in the industry, recouping those heavy capital investments would take several years. What made matters worse, Lubbers could only depreciate her container expenditures over seven years, while she was able to extend her payments no longer than three years through supplier financing.
When the company ran out of cash, Lubbers realized she had to "analyze every prospective new account to make certain it would pay off for us in the bottom line."
Now, before signing up new business, Lubbers analyzes the total cost of servicing it, which includes the container price (roughly $100 per cubic yard) as well as prospective charges for financing, trucking, fuel, labor, repair and maintenance, insurance, and administrative overhead. Some unexpected factors turned up on her list. "Now we look at the geographic proximity of each prospective account to our existing client base. If we have to travel too far or haven't targeted a new customer's region for our expansion efforts, that often tips the cost scales."
She urges growing companies to analyze comprehensive costs before accepting any new business. Says Lubbers, "If you can't cover the costs of new business, walk away."