Editor
Contact the Editor

Making Your Sustainability Initiative Profitable
Combining lean efforts and securing tax credits can offset costs.
By Mike Lewis, Partner, RubinBrown

The Environmental Protection Agency defines sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Corporate management often sees green initiatives as expensive propositions that ultimately reduce profitability. However, many manufacturers and distributors that are implementing lean are finding that sustainability is a natural extension of the lean philosophy and can improve profitability.

A lean strategy includes relentlessly pursuing the elimination of waste in all business processes. Manufacturers have done this on the plant floor for many years and now are implementing lean throughout their entire organizations, including office processes and even sales. Lean companies are finding that sustainability initiatives can easily be integrated into this philosophy. Lean provides the framework and tools necessary to implement green initiatives while always focusing on providing value to the customer.

Waste exists at almost all manufacturing and distribution companies in these areas, which are great places to apply lean and begin your sustainability journey:

• Materials Use: Many materials that were once cheap and plentiful are now expensive and hard to find due to rapid growth of other industrial nations. Consider the impact to the environment of the use of material, from the harvest or extraction of the material through the lifetime of your product. When possible, choose materials that are plentiful and organic, such as plant-based plastics that now are widely used in the auto and packaging sectors.
• Water and Chemical Use: Finding ways to reduce, eliminate or recycle water and chemicals is not only environmentally friendly but can also significantly reduce costs. For instance, improving flow at a plant that includes a painting or washing cell often leads to a reduction in wasted paint and/or chemicals due to increased efficiency.
• Energy Use: While energy costs continue to escalate, it is important to find ways to minimize energy consumption. Look at energy used in the production and storage of products, and how the products you make or sell use energy. Working with both your vendors and customers, look for ways to ship more products in the same space by changing the method of packaging or by consolidating shipments. This can result in significant cost savings in the form of reduced freight expense. Using Total Productive Maintenance, as is common at lean plants, keeps equipment running most efficiently, which also reduces energy waste.
• Office Processes: We tend to focus on waste in our production or warehouse facilities. However, many of our office processes contain significant waste — paper-based documentation, paper-based document storage, paper-based check-cutting instead of electronic transactions, overstocked supplies, idle equipment left running, etc.
• Employee Engagement: Let employees know that sustainability is not only about maintaining and improving the environment – but also part of your strategy for being profitable.

Working on these areas now can provide manufacturing and distribution companies with a distinct advantage. First, regulatory standards are most certainly going to be more restrictive in the future. Taking steps now to understand the impact of your operation and products on the environment will prepare you to respond to current and future environmental regulation. Second, voluntary compliance with green standards can provide you with a marketing advantage over your competition, as consumers prefer environmentally friendly products.

Green Tax Credits

Obtaining tax credits is another way to offset some of the cost of green initiatives. These credits vary. They can be issued in many forms, such as income tax credits, sales tax rebates, and/or property tax abatements. Both federal and state governments offer these benefits. They commonly are given for use of alternative fuels, renewable energy, and energy-efficient equipment.

Alternative transportation fuels refer to electricity, compressed natural gases, ethanol, and biodiesel. Credits exist for the purchase of both hybrid and electric-motor vehicles, and for the conversion of a traditional vehicle’s motor to use alternative fuel. In addition, if a company sells or produces alternative fuels, it could qualify for a tax credit.

Renewable energy sources include wind turbines and solar power. Installation of these at a business or home may qualify for tax credits. Some states offer credits for manufacturing renewable energy equipment and additional credits for the sale of electricity that is produced from a renewable energy source.

Energy-efficient equipment is made up of Energy Star certified appliances such as water heaters and refrigerators, but also includes doors and windows. These items, in particular, are typically more expensive compared with models that are not Energy Star certified. Manufacturers of Energy Star certified appliances are eligible to claim federal tax credits. Homeowners could receive a credit for making energy-efficiency improvements to their homes. Contractors may also be eligible for tax credits if their construction projects meet energy-saving requirements.

These are just a few of the tax incentives that the federal and state governments offer to entice taxpayers to go green. Balancing the cost of “green initiatives” with the need to maintain a profitable business can be difficult. The potential for tax credits coupled with a lean philosophy to root out all waste can make your sustainability initiative a profitable endeavor.

Mike is the Partner-in-Charge of the Manufacturing and Distribution Services Group and a Partner in the Assurance Services Group of RubinBrown. He primarily provides audit, consulting, and tax services for manufacturing and distribution clients. Mike has unique expertise regarding the impact of lean practices on an organization’s financial reporting including how a finance team can help facilitate a successful implementation. He also has experience in operational reviews, due diligence related to mergers and acquisitions, individual income tax planning, family business planning, and strategic planning issues. You can contact Mike at 314-290-3391.

Copyright © 2006-2009 Lean Accounting News, LLC