Are unexpected expenses causing leaks in your “profit” bucket?
Business is like a bucket: income flows in, expenses go out, and everything remaining in the bucket is profit. Unfortunately, many business buckets are full of holes. As a result, too many firms are so busy filling their bucket that they never realize how much they are losing.
Unaddressed risk can cause a huge hole in the business bucket. Employee injuries can be a tremendous drain on a company’s profit and, in some cases, threaten the business itself. This is most likely what happened to Grand Rapids Plastics in Grand Rapids, Michigan, which closed its doors in April 2016 after its largest customer, Fiat Chrysler, canceled its contract. In 2014, a tragic on-the-job death of one of the company’s employees resulted in an OSHA investigation, and the company was fined $558,000 for violations. While no one claimed the closing was connected to the fatality, it’s easy to connect the dots.
Companies that … plug leaks in their business bucket enjoy a healthier, safer workplace, better-than-average results, and a healthier bottom line.
According to OSHA, in addition to social costs, workplace injuries and illnesses have a major impact on an employer’s bottom line. It has been estimated that employers pay almost $1 billion per week for direct workers compensation costs alone. The costs of workplace injuries and illnesses include direct and indirect costs. Direct costs include workers compensation premiums, medical expenses, and costs for legal services. Examples of indirect costs include training replacement employees, accident investigation and implementation of corrective measures, lost productivity, repairs of damaged equipment and property, and costs associated with lower employee morale and absenteeism.
As insurance advisors, it’s important to show business owners the potential costs of occupational injuries and illnesses, and the estimated impact they will have on the bottom line. For example, an employee with a back injury costing $50,000 in direct cost will incur $55,000 of indirect cost, for a total of $105,000. At a 3% profit margin, this company will need to generate $2.1 million more in sales just to cover this one loss. To be more specific, a lumber supplier would need to sell an additional 646,000 2x4s at $3.25 each to cover this cost. These costs are a gigantic unanticipated hole in any company’s profit bucket, and they are the reason enlightened employers do everything they can to avoid this. You can find a calculator to estimate the cost of an accident on OSHA’s Safety Pays Program website at: www.osha.gov/dcsp/smallbusiness/safetypays/estimator.html. I suggest you go through a couple of scenarios with business owners so they can connect it to their particular business.
Another way a business can assess how much money is leaking from its business bucket is to check its workers comp experience mod rate. I learned a lot about how to help employers control their work-comp costs from Preston Diamond and Kevin Ring at the Institute of WorkComp Professionals a few years ago, and I continue to use what I learned every day. The experience mod is a score that is given to every business based on the class of industry, payroll size, and work injury rate and severity. A score of 1.00 is average, or the equivalent of a C in school. A score of .75 would be an A and a score of 1.25, an E. The difference can represent several thousand dollars. For example, consider two masonry contractors who lay brick. They have the same payroll estimates. Their manual premium with a 1.00 experience mod is $50,000. Company A has good experience with a .75 experience mod and reduces its premium to $37,500. Company B has poor experience with a 1.25 experience mod and sees its premium rise to $62,500 or $25,000 higher than company A! Not to mention the work they may not qualify for because general contractors and owners won’t hire any company with an experience mod over 1.00.
The good news is that there are many things a business can do to plug these holes in its profit bucket. It can:
- Order a copy of its experience mod calculation
- Check the data for accuracy by comparing it to payroll audits and loss information
- Request that errors be corrected
- Evaluate claims procedures and change to “best practices” if necessary
It’s important to understand that the workers comp experience mod is a lagging indicator, using data from policy years that do not include the current policy year or the one before that. That is why it is critical to examine loss information from the past five years to evaluate what the trend is. I also review OSHA logs and compare them to the loss information, to see if they are consistent with each other and to check for errors. We use a software program developed by my son, Dustin Boss, called OSHAlogs.com. This program records an incident, completes the OSHA log and calculates incident rates automatically in real time, providing critical information needed to comply with OSHA reporting requirements.
An honest assessment of safety-related incidents is critical if a company wants to plug profit leaks in its business bucket. One great example of this was in chapter 4 of Charles Duhigg’s book, The Power of Habit. It describes how Alcoa’s CEO, Paul O’Neill, focused on safety to transform its business and culture to lower costs, and increase sales, quality and productivity. O’Neill focused on worker safety—something everyone could agree on—and harnessed that as a basis for change. As a result, sales rose from $1.5 billion in 1987 to $23 billion in 2000. Even after he retired, safety has remained at the core of Alcoa’s business. I recommend reading The Power of Habit to understand how to form and shape safety-related habits.
Companies that follow these steps to plug leaks in their business bucket enjoy a healthier, safer workplace, better-than-average results, and a healthier bottom line.
Randy Boss is a Certified Risk Architect at Ottawa Kent in Jenison, MI. As a Risk Architect, he designs, builds and implements risk management and insurance plans for middle market companies in the areas of human resources, property/casualty & benefits. He has 40 years experience and has been at Ottawa Kent for 35 years. He is the co-founder of OSHAlogs.com, an OSHA compliance and injury management platform. Randy can be reached via email at email@example.com