The Importance of Financial Discipline Part 2

Part 2: Increasing Profits by Eliminating Leaks

Listen carefully.  Can you hear it?  That’s the sound of your business losing profits . . .  one drip at a time.

Unless you are always questioning, “Are we doing everything we can to keep our costs down,” your business could benefit from adopting a “Drip Culture.”

A Drip Culture is simply the process of attending to every “leaky tap” in your business – the evergreen equipment lease that automatically renews, the contract that hasn’t gone out to bid in several years, the old fee structure that no longer provides the best price for your current business volume.  The more you look around, the more leaks you are likely to find. 

If your business is like most, you are always trying to replace lost profits by increasing sales.  But reducing expenses, or stopping the leaks one drip at a time, is another way to contribute to the bottom line.

Even more worrying is the possibility that indifference to profit leaks in non-core expenses may also extend to your company’s core costs, which would put the business at risk.

The pursuit of a Drip Culture is not difficult or complicated. It’s simply about questioning every business expense.  Drip Culture is not a one-time exercise.  You don’t just do something once and then sit back and think “okay – done!”  Rather, it’s a culture that needs to be kept alive and well in your business.  If actively pursued, a Drip Culture ensures that everyone in your company is constantly checking for profit leaks.  Every time a drip is discovered, no matter how small, it will be addressed.

Drip Culture is about eliminating waste, not cutting out necessary and productive business tasks.  By adopting a Drip Culture as a part of your business plan, the goal of saving money will permeate every part of your company and lead to increased profits.

Here are a few guidelines for bringing a Drip Culture into your organization:

·         Do not overlook any costs when looking for profit leaks.  No business expense is sacred. 

·         Constantly ask, “Is this expense really necessary?”  If your answer is “We’ve always done it this way,” that’s a sure sign of a cost that can be reduced or even eliminated altogether.

·         Write down the savings you expect for a cost – then double it.  Most of the time we limit our efforts to our expectations.  Why be satisfied with saving 10% when you may have easily achieved a 20% savings?

·         Ensure the changes you identify are implemented. Many good money-saving ideas are lost simply through a lack of action and the drip continues.

• Make sure you can measure the savings.  That’s the only way you can be sure you have achieved cost reductions.  Reward yourself by recording the results of your efforts.

As your record grows, you will be well on your way to a Drip Culture that values adding profits to the bottom line.

Wes Thompson is the Managing Director for Michigan with Expense Reduction Analysts, a consulting company that specializes in reducing overhead expenses. He is also a member of The Business Improvement Team, a consortium of Southeast Michigan consultants that can address all aspects of operational improvement.  He can be reached at (248) 672-3504 or wthompson@expensereduction.com

The Importance of Financial Discipline Part 1

Part 1: Twenty ways your business can save money

When you undertake to start a new business you often have to begin from the floor and build up from there.  You may have leveraged your savings, or borrowed money, or have obtained an investment from an Angel Investor.  Either way, it becomes vitally important that you are a good steward of your financial resources.  The most common failure mode of new business ventures is “running out of money”.    Here are some simple suggestions on how you can be a pro at managing your costs.

Here are 20 simple cost-cutting ideas for businesses:

1. Consolidate purchases. You might be buying the same goods from different suppliers. Consolidate purchasing to maximize discounts through bulk buying power.  Many suppliers can offer a wide variety of goods.  Your office supplies vendor may also sell break room, janitorial, and health and safety supplies.

2. Cut the paperwork.  Reduce paperwork by requesting monthly consolidated invoices to reduce administrative costs.

3. Demand a reason.  Don’t accept a price increase without challenging it.

4. Get a second opinion. Obtain alternative quotes on everything. Advise existing suppliers that you are going out to bid, and give them a chance to reduce their prices.

5. Call in a bad guy. Don’t allow the person who is in daily contact with a supplier to negotiate price. Use the good cop/bad cop approach. The “bad cop” removes emotion from the process, and the “good cop” can preserve the established, day-to-day relationship with the vendor.

6. Ask for ideas. Take advantage of your suppliers’ expertise by asking them for suggestions to improve the way you work together. Would ordering twice a month instead of weekly reduce their administrative costs? Could they pass the savings on to you?

7. Insurance. Contracts that provide incentives for brokers to find the best coverage, as opposed to accepting commissions from insurance companies, typically lead to large savings and improved coverage.

8. Make space. Reduce your stock levels and encourage suppliers to hold stock.

9. Review product specifications. Ensure that products being used do not exceed requirements. Can you use secondhand pallets for transportation? Recycled toner cartridges?

10. Examine cleaning procedures. Are factory items such as mats being cleaned more often than necessary? You might be able to reduce the frequency of cleaning and still maintain safety standards.

11. Don’t let money go to waste. Your garbage bins might be emptied well before they are full. Can you cut back on the number of weekly or monthly collections? You also might have the opportunity to recycle by simply setting up bins in break and kitchen areas.  This applies to all your business waste.

12. Keep your feet on the ground.  Understand how you are charged for small-package freight. Local services might be best for early-morning deliveries, while worldwide carriers such as FedEx and UPS might offer lower prices for local delivery of letters and packages scheduled for later in the day. Determine which services will be most effective, and establish guidelines for your staff.  Rarely send a parcel within Michigan by next day air as it is very unlikely that your mailing will ever see the inside of an airplane for an in-State delivery.  A ground shipment is generally just as fast.

13. Watch out for automatic renewals.  Contracts for leased equipment, such as copiers, automatically renew. This automatic rollover is called an “evergreen clause,” and it locks you into subsequent years at the same terms as the original lease. Typically, you must notify the leasing company, in writing, 90 to 120 days before the expiration date to avoid an automatic renewal.  Often these agreements have automatic price escalation too.

14. Beware on service agreements, too. These often also have evergreen clauses and need to be terminated in writing during a specific time window. To make things even more confusing, termination notification periods for service agreements vary from the periods used in the lease agreements. The window is typically 30 to 90 days before the expiration date.

15. Try “brand X.”   Use suppliers’ own brands of products. They can be priced as much as 30 percent lower than name brands.

16. Pack it up. Cartons printed with unique information, such as a company name, are expensive. Instead, consider using less expensive plain cartons sealed with customized tape or printed labels.

17. Cut and coordinate. Clean up your database to reduce returned mail. Coordinate your marketing mailouts to take advantage of bulk rates.

18. Shoot the messenger. Investigate alternative methods of disseminating information. Can you use e-mail rather than snail mail? There are companies that specialize in distribution methods to suit your preferences.

19. Stop the presses. Always use standard paper sizes. Although printing larger quantities at one time means lower per-item costs, if you only need 7,000 brochures, it’s still cheaper to order that number at $3.30 per unit than it is to pay for 10,000 at $2.80. Companies tend to over-order to get lower prices, but then don’t use the stock.

20. Toss the excess.  Don’t pay to store boxes simply because you haven’t worked out whether you need to keep them. Review your storage costs!

Wes Thompson is the Managing Director for Michigan with Expense Reduction Analysts, a consulting company that specializes in reducing overhead expenses. He is also a member of The Business Improvement Team, a consortium of Southeast Michigan consultants who can address all aspects of operational improvement.  He can be reached at (248) 672-3504 or wthompson@expensereduction.com

About Wesley Thompson

Meet Wesley A. Thompson; (Wes)

Managing Director, Expense Reduction Analysts

Partner Member, The Business Improvement Team

Wes has been the Managing Director at Expense Reduction Analysts (ERA) since 2008 and is responsible for all Michigan operations of this international financial consultancy.  ERA specializes in management and control of non-core expenses, has completed over 14,000 successful projects, and averages a savings of 20% on each project.  The ERA Michigan team includes 10 consultants in locations across the state.  Wes is also a partner member of The Business Improvement Team, a Michigan consulting consortium that provides a wide range of improvement services to small and midsized businesses.   Prior to this Wes spent over 20 years in senior management with firms such as General Electric, American Safety, BTR Inc., GenCorp/Aerojet, Toyoda-Gosei, and Saargummi Inc.  Wes is also a business Mentor at WSU’s TechTown Technology Incubator.  He has a BS degree in Electrical Engineering from Michigan Technological University and a MS degree in Industrial and Systems Engineering from the University of Michigan.  A Michigan and Detroit native, he currently resides in the metro-Detroit area with his wife of 38 years.