Make Cost Monitoring Routine
Controlling fuel company costs is an important part of the mission at Angus Energy. Oil & Energy recently caught up with two members of the Angus leadership team, Robert Levins and Jeffrey Simpson, for an in-depth look at cost control—a topic that draws on their parallel approaches to business process improvement.
As Managing Partner of Angus Analytics, Levins manages BRITE®, a business intelligence platform that uses company data to deliver insights and provide guidance. Simpson, Managing Director of Angus Finance, helps Angus clients plan their finances, increase profitability, navigate transformational transactions and manage banking relationships. (They prepared written answers to our questions together, and all quotes attributed to Angus come from both executives.)
One of the unique challenges in the fuel industry is that the majority of the costs tend to be fixed, they said. “This can place quite a burden on the management team when the weather impact or commodity cost volatility is unexpected or less than ideal. Having the ability to control costs effectively requires that cost expectations be tied to a broader plan,” they said. “Once a meaningful plan is in place, we find regular measurement of costs in comparison to this plan is a vital process in determining whether a company will have success or face lackluster results (or worse, losses). The question then becomes, can management control both variable and fixed costs with discipline?”
We asked them how difficult it is to keep track of costs and account for them properly. “At a minimum, projected costs should be segmented down to the division level (e.g., fuel delivery, service, installation, etc.) and should, of course, be tailored for each month,” Levins and Simpson wrote. “Specifically, keep a close eye on labor, particularly during colder than normal winters or during uncharacteristic events (Superstorm Sandy in the New York City region and the crush of demand for service and installations comes to mind). There are ways to benchmark against others in the industry to determine if certain expense categories are causing undue drag on your operation.”
Vision Through Software
Levins and Simpson said that software-based intelligence can be an invaluable tool. “The primary benefit is timely, accurate and purposed data, to the right people within your organization at the right time. We are big advocates of daily, or at a minimum, weekly tracking of profitability versus a pre-determined goal. If a dealer has clarity of data and clarity of purpose, rational decisions on expense controls, margin setting and the use of financial risk management tools tend to follow.”
Business intelligence tools can help an owner or manager demystify what is happening in their business, they said. “Understanding your numbers, as well as having visibility and clarity of any deviation from plan, supports informed decisions and closer-to-predictable arrival at month-end goals,” the Angus executives wrote. “In challenging heating seasons marked by weather volatility, commodity cost volatility or larger than usual impact on operations due to snow and ice conditions, a series of ongoing, uncomfortable decisions about cost controls (and margin setting) beats the realization at the end of the season that there is no realistic way to make up lost ground on profitability. Unfortunately, too many in our industry still analyze results on a monthly basis and this is an ineffective way to control the operation.”
A dealer that has a firm handle on its costs has a decisive competitive edge, according to Angus. “Closely monitoring performance coupled with an understanding of the impact that daily operational decisions can have on one’s costs can go a long way to providing a greater sense of what could or should be attempted in order to gain a competitive edge, on either a reactive or even proactive basis,” they wrote. “Having daily visibility of variable costs that might be conflicting with company standards and goals permits timely and informed adjustments to the dealer’s competitive positioning. Keep in mind that the greatest edge any dealer can have over their competition is long-term financial stability.”
Angus developed BRITE to parse the customer and operational data generated by back office software and deliver insight. Angus pointed out several areas where BRITE helps managers control costs.
Budget Variance: “Setting goals, even at the most basic level of liquid product volume and margins, can go a long way in illustrating the value of planning. Through purposed reporting, the monitoring of variances to goal on a daily basis encourages the dealer to react immediately in order to remain on course throughout the month. Instead of creating a budget and then, as many in our industry experience, struggling to find the time to compare your actual results, BRITE allows users to enter the gallon, margin and gross
profitability goals and see a comparison each day automatically.”
Margin Analysis: “When we speak with senior management in this industry about what to watch, without exception their response is, ‘It’s all about margins.’ The once-simple margin calculation must now incorporate pricing programs, their related hedge positions and their daily “mark-to-market” impact on margins. They must be monitored at a more granular level, surfacing any variations from the standards that might have otherwise been buried within the averages. This means down through product, trade class and price program level, right to the individual customer’s transaction. Recognizing margin oddities and fixing the business processes immediately will not only correct the problem at hand but enhance the desired culture of no-tolerance on margin variances and this translates to savings.”
Gain/Loss Reporting: “Long-term financial stability requires sustainability. Retention of existing customers while, at the same time, growing customers and gallons organically or through acquisition is a constant concern for most dealers. Although the industry average for a customer gain is quoted often as $600 to $900, depending on the market, it is also a fact that the first 18 months of a new customer’s engagement with a dealer can be very inefficient while their burning rates stabilize and their hidden equipment needs rear their ugly head. It is also important to know whether your marketing spend is yielding your desired results as indicated via your gain reasons. Well-defined loss reasons will indicate areas in which the dealer may require some attention. We find the effectiveness of the dealer’s marketing and sales spend, coupled with a more aggressive program of customer retention, leads to a ‘net-ahead’ in quality of customers that will translate into real dollars.”
Delivery Performance: “Whether it be fuel oil, propane or any other liquid product, we all understand that in the end the efficient use of a dealer’s trucks, vans, tanks and associated resources will determine the difference between making adequate earnings levels or missing them within a season. The importance of this cannot be underestimated and must be diligently reinforced on a daily basis with clear targets set, delivery resources educated on how and why their performance is being measured, and close monitoring of the target variances daily. Reporting, in the form of driver and/or delivery metrics such as gallons/hour, stops/hour and percentage of ideal drop size as examples, allows the dispatch department and management to immediately recognize issues that might arise in the process, discuss and then take corrective action as necessary.”
Service: “As with delivery, service transactions have their share of cost and inefficiency that we all attempt to minimize. Whether it be the length of certain calls vs. a standard set by the service manager or parts used on a call, installation margins, callbacks by technician, or a customer’s excessive calls within a certain period of time, any report in these areas is designed to highlight what is ‘normal’ and what is not. The fact is too many calls to the same customer tend to lead to lost profitability on that customer. Dealers commonly admit that this is a very expensive problem area and requires attention. Good reporting prefaced by a good understanding of what to look for as low-hanging-fruit, such as with the issues mentioned above, will lead to significant dollar savings, through corrective action and business process changes.”
We asked Levins and Simpson to suggest some best practices for allocating costs in order to improve the understanding of how they flow through the business. “We have found that if the dealer monitors the volume, margins (yielding extended gross margin), service revenues and payroll within each month, based on a plan, the company will have a good handle on how it is performing on a daily/weekly basis and can then make the adjustments where necessary. When preparing a budgeting plan, the dealer should refer to specific monthly historical expense data as a reference point so that each individual month is tied as closely to reality as possible.
If you don’t have the granular historical data at present, use your best guess based on annual history, but begin to build out realistic monthly cost goals so that, in time, you can accurately assess whether or not you must control costs, raise revenue targets, or both. The sooner you start this approach, the better.”