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Can you model a 'reduction in the cost of doing business' as a positive outcome?

You would have to make an assumption about the result/aim of reducing business costs. Read the article below for a detailed explanation by our consulting economist, Keenan Jackson.

Q:

I’m seeking some advice on some modelling I’ve been queried about. Some of the South Australian State Government Grants have a focus on demonstrating a reduction in the cost of doing business.

What I’m wondering is if there is a way to model the broader benefits of a business reducing its operational costs beyond simply stating the value of the reduction?

So, if a grant funded a project, it would reduce the businesses operational costs by $X which would have broader economic benefits for the region of $X etc.

A:

You would have to make an assumption about the result/aim of reducing business costs.

For example, is it to

  • attract new businesses to the regions?
  • allow existing businesses to maintain operations in a competitive market?
  • allow existing businesses to expand operations, as they will have extra profit to reinvest post cost savings?

Looking at the Regional Growth Fund guidelines, I feel the first and last point are the most important – new activity and increasing scale.

Once, you have developed an assumption about this you can model as usual.

For example, if you feel a piece of infrastructure would reduce business costs for 10 businesses in an industry by 100k per annum, and that 50% of this reduced cost would be reinvested into the business (not taken as additional profit), you can model $500k through the economic impact model (open our directory of economic profiles to find an economic impact model. Please note these tools are for council use only.)

To support these assumptions, you would surveyasking likely businesses. ‘How much would this save you?’ Would you reinvest savings?’ ‘How much would you reinvest?’

Attracting new businesses is an interesting one as, reduced costs could attract additional businesses but in theory make the market more competitive for existing ones challenging profit margins.

Hope this helps.

Keenan Jackson