Gibraltar: The Price Of Hidden Costs

As I write this, we have just celebrated the May Day public holiday in Gibraltar and the UK is about to close for the early May Bank Holiday. Having the day off here in the middle of the working week made for a nice change of course but it also set me thinking about the cost of the one-day shutdown.

May Day is of course marked in several other European countries, as well as North America, as a commemoration of the traditional Spring festival, and in many other countries around the world it is also celebrated as International Workers' Day. It may be very popular to have these days off – particularly as the weather turns warmer here in the southern Mediterranean – but there is a cost to business, and therefore to the economy, that may not be immediately obvious.

First, I thought I'd take a closer look at the number of public holidays. I am often told we get too many here, but is this really correct? It's certainly true that in 2013 at least we are getting four more days than the UK – Commonwealth Day, Worker's Memorial Day, the Queen's Birthday, as well as Gibraltar Day itself.

But in comparison with other countries, we seem to be about right. By my calculation we enjoy 12 public holidays annually. True, this is somewhat less than Spain but then each autonomous region adds its own "fiestas" on top. A report by ABC News last year named the lucky Argentines as being the most fortunate as they had a total of 19 days off last year.

In the UK and Gibraltar we don't call them "bank holidays" any more. When I was young, I used to be told that bankers were the top of the pile so when they had a day off, so did we all. It was one of the arguments sold me when I joined a bank all those years ago. Not quite the same today, methinks!

All of this is in addition to paid time off, which also varies from country to country. It has always struck me as odd that the US is one of the countries one associates most with leisure time but it remains one of the most stingy when it comes to paid time off. Two working weeks annual leave is still very common.

But think of an organisation close to you and consider for a moment the cost of even one extra day off to that business. In my case, Sovereign employs around 80 people locally so if taking a five-day working week that is almost four working months. Crikey, I'm beginning to sound like our Finance Director but it does all add up to a lot of time – and money.

This can be of even more concern to smaller firms where cash flow is very tight – a start-up perhaps. I went on to think about other hidden costs that a business might consider and what, if anything, can be done to mitigate them.

Here in Gibraltar, as summer approaches, staff working in government – and some private sector firms too – start looking forward to summer hours, It's a great idea in theory but of course there's another side too. Leave aside the obvious shorter working week – it's to be assumed that any organisation or firm allowing reduced working hours during the summer takes account of this when setting pay levels. The "hidden cost" applies also to other businesses – such as ours – who have to work with the fact that government offices are simply not open from mid-afternoon during the summer.

There is a definite cost to this and of course the potential for some clients or customers who have a choice to simply look elsewhere – i.e. away from Gibraltar. Don't worry dear reader, this is a personal column and of course I am not going to start a campaign here. It would be a brave politician indeed who would dare to tackle this and of course there is another more positive side to the summer hours arrangement for families and local business. I'm just pointing out that it does cost us all, that's all.

Staffing is only part of the issue. There are many other costs involved in day to day business. This is true for any company "selling" something, be it any kind of service, a widget or indeed a bar or restaurant. At Sovereign, I am always stressing the importance of considering the "client acquisition cost". There is no point selling something – anything – for £10 if it has cost £12 to produce. My friends in retail will immediately say "ah, a loss leader you mean". They would define that as selling something at a loss to encourage someone to buy more from you somewhere else. As my economics tutor taught me – "focus on the word loss boy". Not a bad thought, that.

The wide range of hidden costs that goes into producing and selling anything can be quite daunting – especially for a new business. It may upset those salesmen we all know or "business development managers" as they're likely to be called these days. But the price you secure from your end-user client must cover everything and should still leave a surplus if you are to stay in business. So what costs am I concerned about here?

There are some obvious things. Let's assume the widget or service being sold is either already made or finely tuned so we have something tangible to sell. What costs are involved in getting to meet your customer? Drive into Spain for 100km (and back), pay some tolls, buy some lunch on the way and the costs soon mount up. Fine if you're selling something expensive but be careful that the dangling carrot of the sale doesn't tempt you into spending too much in an effort to pluck it from the tree (I know carrots don't grow on trees but you know what I mean).

Then consider what in my view is the most commonly overlooked "hidden" cost of all – that incurred by you, or your business development manager, whilst out seeking that elusive carrot. To carry on the metaphor, consider the tomato growing just over there that you did not secure – because you were dealing with the carrot. The economist will call this the "opportunity cost" or to quote the dictionary "the loss of potential gain from other alternatives when one alternative is chosen".

I have often come across situations where a colleague (or maybe a competitor!) spends more time on what may appear to be an easier "sale" – rather than stretching themselves to secure that elusive but perhaps more demanding and therefore lucrative business. The point about opportunity cost is that if one spends time today doing something – anything – then the opportunity to do something else is of course lost for ever. The hidden cost could be significant.

Other costs may not be "hidden" but, if they are not considered at the outset, can be just as detrimental to the bottom line. I could cite several examples but perhaps one of the best is insurance. I don't mean the obvious things such as fire and theft protection but such areas as public liability or directors and officers insurance. The cost adds up – but of course the implications of not protecting a business in this way could be catastrophic.

There can be any amount of hidden costs to consider, especially when setting out in business for the first time. Some can be mitigated by outsourcing if one can realistically get certain functions performed at a lower cost elsewhere. But the cost in pounds and pence should not be the only consideration. For example, there is no point in outsourcing something if in doing so you are cutting yourself out permanently of the same business.

As always when considering new ventures, my advice is to take professional advice from the outset. Our firm has whole departments dedicated to assisting businesses – both here and around the world – looking at such issues. But whether or not you decide to approach a specialist corporate service provider or not, do take soundings from others. Look at the costs you know about and keep looking for those hidden costs; it is managing those effectively that will make all the difference in the world to whatever venture you are contemplating.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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