Can Safety Generate Business Revenue?

In order to understand the real cost of safety and how safety can generate revenue for the business there are a few questions that should be looked at:

· Do business owners or managers know what the real cost of safety is and how this affects business revenue?

· Does the company safety specialist regularly report on safety, financially as well as statistically?

· Does financial reporting accurately reflect the complete costs of safety? If not, the accountant and safety specialist should be able to identify those costs and returns as line items in the financial reports.

A successful business realizes safety is an integral part of their operations and expects safety to be managed accordingly. Another business may believe safety is a financial burden and simply a cost of doing business with no return on investment and a waste of money and talent. However, money and talent are two valuable resources used to improve business revenue.

When the owner or manager decides to invest in business enhancement they begin by analyzing a project or business operation in order to decide what the best improvement is for the best value and how the business can expect a return on the investment. The financial return can be determined by the break even point or the profitability of the project.

The same business principles should be applied to safety. Every expense related to safety should be viewed as an investment. With this business basic in mind; “Why do business managers keep spending money and allocating resources on safety and expect no identified return and hope safety improves?” The businesses that spend money blindly on safety do not know or understand how safety can be an integral business element. Once this business element is accepted safety becomes the same as any business function. Then the same attention is given to costing and returns on investment.

To understand how safety can realize a return on investment a change in traditional thinking is required. This needs an analysis of accounting processes to identify revenue and expenses that parallel standard financial reporting.

The first factor to understand is the real cost of safety. This cost is not strictly associated with salary, time spent in training or buying protective equipment. These costs should be considered an investment, then decide what return is acceptable for the investment. Spending on safety just to comply with legal requirements is short sighted.

In order to understand the true cost of safety the business person must look at the cost of being unsafe. When these costs are identified then the true cost of safety can be understood.

Here are some situations that illustrate the cost of safety:

• Employee Injury – first aid services and supplies, ambulance charges, lost production time because the workplace stops until the situation is contained, time spent for all levels involved in the investigation, additional administration time involved to make out required reports, possible increase in Workers Compensation rates, cost of replacement worker, overtime paid out to maintain production goals, dedicated person to assist regulatory investigating personnel, loss of product, loss of equipment, replacement of equipment; etc.

• Regulatory Violation – potential fines in the thousands of dollars, time spent going to court, legal fees, cessation of a portion of your business until the situation is resolved, loss of production, loss of product, loss of customers, adverse publicity; etc.

• Inadequate Safety Management – improper safety equipment, unsafe work stations resulting in employee injury, abuse of safety inventory, poor employee morale which reduces production, increase of employee absenteeism resulting in increased payroll costs, increase in regulatory and criminal liability (ignorance is no excuse in law), possible increased regulatory inspections, increase in insurance rate, restricted business expansion due to safety record and reputation, waste of company human and financial resources, etc..

Once the actual safety expenses are identified and tabulated, a determination can be made as to how safety begins to affect the revenue needed to support the business operation. For example, business pays a WCB assessment which is only one type of safety expense. This premium is usually set by industry rating or individual company rating and has a direct influence on operating revenue.

For example: ABC Company has a payroll of $1,000,000 and a WCB Assessment rating of $2.00 per $100 of payroll, and operates on a profit margin of 20%. The gross revenue required to pay the WCB premium can be determined as follows:

Payroll of $1,000,000 divided by $100 equals 10,000 units at $2.00 per unit equal to $20,000. With a profit margin of 20%, this requires a gross revenue of at least $100,000 before any other business expense is taken into consideration. This $100,000 gross revenue is required just to pay the WCB Assessments before other business expenses are taken into consideration.

This example illustrates how the cost of one safety element can directly affect the profitability of the company. A reduction in this expense will directly affect the profitability of the business. In order to reduce this expense an investment is made that is directed toward improving the WCB safety rating thereby reducing the assessment.

For example, ABC Company decides to invest $4,000 directed toward reducing injuries and lowering the WCB Assessment costs. When this expenditure is approached in a normal business manner the company must at least recover the $4,000. However, it is more desirable to recover the principal amount plus a profit. Therefore, ABC Company sets their goal to earn a 25% rebate on WCB Assessments, thereby recovering $5,000. This money will cover the initial expenditure and provide the company with a return on investment (ROI) of $1,000.

There are different ways to achieve the 25% reduction goal such as obtaining a Certificate of Recognition (COR), developing safe work practices to reduce injuries, management work place safety inspections, just to name a few. ABC’s safety specialist must be knowledgeable in business operation and financial processes to ensure that the investment and the ROI are being tracked. Therefore the accounting system of the business should be designed so that the costs and ROI can be formally reported. This financial report provides the business with verifiable criteria to measure the success of the safety program.

Once the goal has been reached and a WCB rebate of $5,000.00 is received, the same rebate can be realized year after year increasing your ROI continually. Providing the safety system continues to be managed effectively the ROI will carry on.

When money is invested on safety make certain you know what you are investing in, why it is being invested, and what kind of return is expected from on your investment. Having a safety specialist and complying with regulations without an overall effective safety management system fails to capitalize on a business opportunity.

Safety is a monetary investment and when handled as such will provide additional revenue and a substantial return on your invested dollars. Invest wisely not blindly.

Written by:

E. A. (Art) Nordholm CRSP CHSC
Partner – OASYS Canada Inc.