Over their heads in energy costs? Energy and operational efficiency for SMEs
September is energy month here on the Abacus Insider. Over the next few weeks I’ll be posting selected articles looking at some of the important energy-related issues faced by small and medium sized businesses operating across Ontario, and how different approaches to these issues can be integrated into company strategy.
To kick things off, today I’m going to briefly discuss incentives available through the Ontario Power Authority’s ‘Save on Energy’ program and how businesses can use these incentives in conjunction with internal strategy to maximize success.
Energy can be a major overhead cost, especially in the manufacturing sector, but with many efficiency programs requiring upgraded equipment or new infrastructure, such upfront capital costs can be a hurdle to efficiency for many businesses.
From a customer’s perspective, the way a business or supplier deals with its energy costs can also have a major impact on the price of goods and services. To set prices, companies usually assign their overhead costs to the products they sell in order to ensure they aren’t unknowingly missing out on potential revenue. Depending how this is done (correctly, accurately, or not) and the type of industry, there could be substantial variation in price levels, and therefore distorted price signals to both the buyer and seller.
In order to be as competitive as they can be, small and medium sized businesses must not only work to control their energy costs, but also be as accurate as possible in attributing those costs to production.
So what can business owners do about energy?
The OPA’s Save on Energy program provides a list of incentives to businesses across most industries for saving across a range of areas, from equipment upgrades through tax abatement. Having a look at what’s available to your industry is a great start.
Staying on top of overhead and pricing are two key components of almost every business. Too often, small and medium sized business owners look to wages and labour costs as a cutting tool (usually because labour is one of the largest expense line items). However, it often makes much more sense to begin with an analysis of direct and indirect overhead spending.
This second step in addressing energy costs involves asking one simple question about your business’ pricing structure – are your overhead (including energy) costs properly reflected in your prices? Although the question is straight forward, the answer may not be. There are several methods for properly identifying and allocating overhead to the cost of production, and therefore into a pricing model. Finding the right method for your business could mean the difference between making and losing money on a product line, and perhaps even uncover avenues for further savings.
What’s the Bottom Line?
The Ontario Power Authority provides a wide range of incentives to help businesses save money and make energy efficient capital investments, but there’s also often room for improvement within existing operations where energy efficiencies can be found. By carefully examining internal processes (often with outside help), businesses can really maximize their energy efficiency, pricing strategy, and overhead management simultaneously.