By Mike DuBose
In order for a business to remain viable, it must take in more money than it spends—in other words, it must be profitable. Sounds simple enough, doesn’t it? But there is no easy formula for making a profit. It is actually a combination of many different strategies that need to occur simultaneously in order to work. Key components are keeping your expenses in check and saving money wherever possible. While the sales force may be charged with generating income, everyone at every level within the company needs to be involved in preventing waste and reducing expenses. This mindset must be a part of the culture.
Buying Quality Materials at the Lowest Price
It has taken me about thirty years to figure this out, but you want to purchase high quality materials, supplies, and equipment at the lowest possible price—without compromising quality to get a lower price. A friend of mine once said that I could squeeze the buffalo off a nickel because I was so tight! I have always liked the nice things in life, but in the past I always tried to buy them too cheap. Sometimes, when I see state government and other organizations sacrifice quality for the lowest price, I think, “They get what they pay for!” There have been times, even in recent years, where I traveled the cheap route only to regret the decision. As Norman says, “Don’t settle for cheaper equipment that doesn’t meet your company needs in order to save money. The costs will be greater in the long run.” [1] The bottom line: go for high quality that will last for years.
Establish a Purchase Approval Process
The next part of your purchasing strategy is to keep each employee in the communication and approval loop on expenditures. This prevents waste and ensures that everyone is communicating on how money is spent. In the 1980s, I did not have these controls and decision-making was left in the hands of a few people who spent the money—sometimes too liberally. Once the purchase is made, it is too late. I will never forget when one of my store managers spent $1,000 on flowers for my computer retail business. They looked great! However, we did not have the money to spend for that purchase. The real problem was that we did not have a set budget or checks and balances, so there were no plans or guidelines for spending money.
Unfortunately, there are many examples of wasteful spending that can be found in our culture. During the federal government’s 2008 bailout of the automobile industry, three auto company CEOs took separate private jets to the same city for the same meeting! No wonder their companies were on the brink of bankruptcy.
When some employees think they are spending the company’s money, they are not quite as thrifty. We try to motivate everyone in our companies to see that the companies’ money is their money, too. If they save, they are rewarded. Every time a manager wants to spend money, I always ask, “Do you have money for it in your budget?” Staff has to understand that a few dollars saved here and there can add up to thousands each year. Every little bit helps the company to survive and puts more money in employees’ pockets through our profit-sharing program.
As CEO, I initial every invoice before the accountant pays the bills. This is another layer of responsibility to detect waste and kept me informed on how money is being spent. CEOs should be actively involved in the budget process and should monitor both revenues and expenses. Otherwise, you may find your company has run out of money. Of course, this may not be applicable in businesses such as construction where hundreds of purchases are made every month, but large business owners still need someone watching how the money goes out the door, from the person who made the purchase to the person who pays the bills to the CEO.
We centralize most large purchases through gatekeepers in each of our companies who have the authority to buy expensive items themselves. We try to incorporate some freedom into the purchasing process by allowing all employees to spend up to $100 per purchase without approval (for example, buying a $50 calculator). The Director of Administration monitors these purchases to determine if they are appropriate and if we have something already purchased they can use. Expenditures of $100 to $1,000 require a team leader’s approval; those costing more than $1,000 require my approval before the purchase. This is not to micromanage the employees, but to maintain a process of reasonable checks and balances. We also try to keep the process moving along without becoming too bureaucratic. When bills are ready to be paid, our financial director ensures that they are accurate and they are placed into a folder that I review several times each week. I stand at my office mailbox to initial invoices and return them to the finance director within the same day for payment. Therefore, everyone is in the loop on purchasing and I see where every dollar is going.
This approval structure has worked really well, but the key is to keep the process, requests, and bills moving along in an orderly and expeditious manner. For example, we have computerized the request forms so they can be transmitted and approved through a paperless electronic system.
Using Credit Cards with Benefits to Pay Bills
If you time your bills right, you can make large purchases the day after your credit card statement comes out and you will have nearly 45 days before the payment is due, which helps with cash flow. We pay most bills with credit cards that provide rebates or airline miles, often using our American Express card because it gives the company Delta SkyMiles. For every dollar charged to the credit card, we receive one SkyMile. These miles are then used to purchase tickets for staff or consultants when their airline tickets cost more than $500, reducing travel expenses. If the ticket is less than $500, we pay cash. When employees travel this way, the company also obtains additional credits called SkyBonus points with Delta Airlines and their partners.
Accounts payable are set up to automatically bill the credit card, condensing the time and labor used writing so many checks into just one payment to the credit card company. All your bills should be automated like this to reduce labor time. We also provide a company credit card to each employee for small purchases like meals or supplies. Of course, these cards have limited credit lines and are closely monitored. When employees use their cards to make purchases, they are responsible for providing the receipts to the director of finance. The bills are then attached to a master bill that is reviewed and approved by myself, the finance director, and key managers each month. Giving employees access to their own cards reduces administrative time and hassles.
Many other organizations pay their bills with checks or credit cards that do not provide any rebates or airline miles. Why waste this opportunity to get back some of the money your business spends? Our American Express card generates more than 500,000 points each year, which buys a lot of airline tickets and hotel rooms and saves the company a good bit of money! Plus, our American Express OPEN business credit cards also generate rebates.
Coordinating Travel Expenses
Because of the nature of our work, our travel budget is significant. To further save money, we established an internal corporate travel agency to obtain commissions on employee hotel rooms, car rentals, etc. However, this is not recommended for most small businesses unless you have a lot of employee travel going on. Instead, assign one person to coordinate travel for staff to ensure that all hotel rooms, airline tickets, and car rentals are bought at the lowest price. At our company, hotel reservations are made through my account. Employees enjoy the benefits of registering as a hotel Platinum Member, which means a guaranteed room even when the hotel is sold out, room upgrades, and other perks like complimentary bottled water. The employee decides when he or she travels, but we have put some controls on travel-related purchases that have saved us a good bit of money, like requiring employees to coordinate their travel. This happened after I observed instances where three employees each used their personal cars go to the same conference hundreds of miles away and the company reimbursed each. As a result, we developed detailed travel policies that outline how travel is reimbursed (i.e., the company only reimburses one car for travel to a single conference for up to three employees). Because we are members of the American Association of Automobile Owners (AAA) and American Association of Retired Persons (AARP), we can reap discounts there for nominal membership fees.
Soliciting Simple Bids
Whenever we will be paying more than $1,000 for an item or service, we try to take quick bids from several brands or companies. Then, we use the lowest bid to influence our desired vendor to lower their price. For example, recently we wanted to install ceiling fans in the porch area of our convention center. The high-quality company that we preferred bid more than $2,000, which was the highest price. Our lowest bid was from another company for $1,500. The company we wanted to install the fans matched the lowest bid and we saved $500. There is a golden rule in negotiating: whatever price a vendor initially proposes is always negotiable and is higher than what they will accept. Everyone in the company should understand that obtaining the highest quality services and products for the lowest possible price is the goal. At the same time, you want your vendors to make a reasonable profit so they enjoy doing business with you.
In some cases, we may develop a written Request for Proposals (RFP) in which we briefly spell out exactly what we want and when we want it done. We include an easy way that the vendors can respond (e-mail, fax, mail, etc.). We have learned that the more details that are provided up front, the more accurate the bid price is on the back end. In other cases, we may ask the vendors to drop by and we will show them what we want done. However, it is very important that you obtain bids in writing. Otherwise, verbal bids can result in misunderstandings and the “he said, she said” begins!
Remember that staff time should be included when calculating prices and bids. We have occasionally spent huge amounts of staff time investigating prices and trying to save money through the bid process when it would have been easier to just make the purchase. In other words, take time to investigate lower prices—within reason.
Supply Purchasing
A business requires general office supplies to support its staff. This may include pencils, pens, copy paper, etc. After years of purchasing, we prefer to buy most of our supplies from discount wholesalers like Office Depot. They provide ready access to an extensive variety of supplies in their regional warehouses and usually have a very competitive price and no shipping costs if a minimum order is met. They will also bill your company with 30 to 60 day terms and allow you to pay for the supplies with American Express (thus giving us up to 90 days to pay for the purchases between the company’s billings and the American Express card once charged).
We provide each employee with an updated supply catalog so they can tell our purchasing agent specifically what they want using the page number, price, model, etc. We also worked with Office Depot to have each employee assigned an account number under one master account so they can order on their own and we can track employee expenditures by staff member. This has been very helpful—in the past, someone would just say, “I need a calculator” and my purchasing agent would go back and forth trying to figure out exactly what the team member wanted. Now, our employees personally order exactly what they want when they need it. In addition, if you have staff located off-site, Office Depot will also ship to them at no charge (with some limitations) and then invoice your organization.
We review Sunday newspaper circulars from vendors such as Best Buy, Office Depot, and Circuit City weekly for specials. For example, we recently needed ten power back-ups for some of our computers. Since this was not an urgent need, we waited a few weeks and bought them at 50% off regular price, saving $500. Thus, in some cases, it is more cost-efficient to purchase locally.
Another idea is to buy large volumes of your most commonly used supplies once a year. Some suppliers will negotiate prices if you make a large purchase ($10,000 or more). Your purchasing agent should build a relationship with one of the salespeople at your favorite supplier so you have one experienced rep to communicate with.
We designated one large room for supplies that only a few key individuals can access. Then, we established smaller supply cabinets with commonly used supplies for each division that are kept stocked by our purchasing agent. That way, we can keep a better handle on inventory while still having supplies readily available to staff.
Inventory Control
As your business matures, you will make purchases that need to be tracked. To do this, establish an inventory control system. A point-of-sale is one way for retailers to plug in your inventory. With other businesses, you need to maintain documentation such as a listing of computer equipment with dates of purchase, regular and/or extended warranty information, model names, serial numbers, etc. This can be recorded on a sheet of paper, an Excel spreadsheet, or with a customized program that tracks inventory and will end up saving you a lot of time and effort! Note that Strauss says, “these days it is far more common (and smarter) to have a computerized system.” [2]
You should also videotape your entire building annually to document the things you own and store the tape digitally online or in a locked, fireproof bank safety deposit box. My house once burnt to the ground and everything was destroyed. The insurance company required that we list everything we had lost, which was hard to remember and document. A videotape in a safety deposit box will make that documentation much simpler if a disaster were to strike your business—ask any business owner affected by Hurricane Katrina!
Inventory should be reviewed every year to determine if you have anything in stock that may be getting out of date or you are no longer using. If you have, for example, three toner cartridges for a laser printer you no longer use, they could probably be returned for credit. Also, maintain adequate supplies on hand so that your purchasing agent is not constantly making orders.
Development of Quality Vendors Guide
Over the past few years, we have developed a guide listing reputable contractors and vendors who deliver high quality products and services, are reasonably priced, and who finish the job on time. We also solicited recommendations from friends, business owners, and colleagues. Now, when we need a quality contractor (an electrician, for example), we consult the list of quality vendors. [3]
Buying Extended Warranties
We have purchased extended warranties on all 70 of our computers and have yet to use one! Often, buying extended warranties is just not worth it. However, if you make your purchase with American Express and some other credit cards, you receive a complimentary extended warranty (up to a year) without having to buy an additional one from the store where you bought the product.
Being smart about purchasing is yet another important factor in a company’s success. Great companies strive not only to bring in profits, but to save on the other end by conserving company resources. Purchasing high-quality goods at the lowest reasonable price is one way to save money and thus protect your company’s financial stability. Remember—you get what you pay for!
[1] Jan Norman, What No One Ever Tells You About Starting Your Own Business (Chicago: Dearborn Trade Publishing, 2004) 49.
[2] Steven D. Strauss, The Small Business Bible(Hoboken, NJ: John Wiley & Sons, 2005) 101.
[3] You can access this guide at http://www.columbiameetings.com/pdfs/QualityVendors.pdf.
