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Squeeze the Most from Every Dollar

“Squeeze the Most from Every Dollar”

To spend wisely, think creatively, tap free or low-cost alternatives and tighten your fiscal discipline. It’s a skill that CEOs ignore at their own peril.

Shrewd business owners know that as their enterprise grows, they must make do with less. They will scrimp and save and plow profits back into the company to fuel its development.Yet other business owners spend with abandon. After each round of financing, they start writing checks for capital improvements, real estate and new technologies. They might also sign costly long-term leases or hire high-priced consultants and executives. Although such expenditures can pay off, there’s a downside: Cash evaporates quickly.

Think like a miser

Just because you now have a viable stage-two business, don’t open the floodgates and spend more freely. Preserving what you’ve built takes even more scrutiny. Some good guidelines:

  • Appoint a “bid manager.” Big corporations have purchasing departments that negotiate volume discounts with vendors and follow strict procedures in authorizing payment and approving employee-spending requests. You can reap the same benefit by naming a sharp employee as your bid manager. Whenever you embark on a sizable purchase, this person can be in charge of collecting at least three bids, negotiating discounts and recommending the “best buy.”
  • Set a thrifty example. Point out to employees how you save money to benefit the business, such as furnishing your office with used furniture or installing sensor lights to cut electricity bills. Recycle office supplies when possible. Recognize and reward workers who suggest and implement money-saving ideas.
  • Hold garage sales. Let employees and their guests buy your firm’s outdated equipment. Make it a fun annual event with music, refreshments and door prizes. This reminds employees of your mission to save money, while allowing them to nab great deals on everything from old computers to file cabinets.
  • Utilize online knowledge. By subscribing to e-mail lists that address a specific topic, you can gain access to money-saving resources. Joining most of these listservs is free, and they can serve as both networking and fact-gathering tools. Say you need to find a subcontractor. You can send an e-mail within your members-only list, describing what kind of person you seek, and then collect leads from other listserv members. An example of a listserv for high-tech business owners is run by the World Wide Web Artists’ Consortium (http://wwwac.org); it has more than 3,000 subscribers.

From ‘what’ to ‘why’

Cutting costs means more than looking at last year’s budget and declaring that this year you’ll find a way to save, say, 5%. Setting random targets can disrupt the business without changing how employees treat the company’s money.

Ideally, you want everyone to scrutinize every expenditure. Your role is to go beyond the what to the why. Don’t just ask, “What is this company spending its money on?” but determine “Why is this cost necessary?”

By reviewing your business insurance, for instance, you may find certain aspects of your coverage are no longer relevant. You can reduce premiums on your commercial-fleet policy if you update your agent on any trucks you’ve sold or vehicles you no longer use for business purposes.

Employing a professional audit firm to review your largest expenses can produce dividends. Suppose you spend heavily on storage, shipping or other transport costs. By inspecting your freight bills, an audit firm may uncover past errors and overpayments. The best auditors also propose steps to lower future costs.

The growth of line-item auditors has expanded in recent years to help business owners clamp down on cash-flow threats, such as an inefficient accounts-payable system, surging telecommunications costs and confusing utility bills. Most audit firms do not charge up front for their services; instead, they collect contingency fees based on how much they save their client.

Writer: Morey Stettner, a management writer and trainer in Portsmouth, N.H., is the author of “Skills for New Managers” (McGraw-Hill, 2000). stettner@attbi.com

CEOs Making it Happen:

Justify every dollar of debt

Tim Bernard views debt as a double-edged sword. A self-described debt addict, he also calls interest the “biggest waste of money” in running a business. Bernard is founder of Happy Trails Products, a Boise, Idaho-based motorcycle-equipment firm that has increased sales 100% annually between 1998 and 2000.

Before Bernard applies for a loan, he writes down his objectives. He only incurs debt if he’s sure that every dollar of interest represents an investment that will produce a hefty payoff.

Bernard brags that he sometimes saves money by spending more of it. If he can buy a part for one of his products that costs $12 from one vendor and $18 from another, he’ll often pay the higher rate.

“Say I rev up production with $12 as my cost for a certain part, and sales take off,” he explains. “Then say that vendor goes belly up. I can’t raise my price for a season, so now I’m eating $6 or more per sale. Sometimes cheapest isn’t the best if you’re shaking the dice.”

Lessons in ad spending

Saving money backfires if you’re shortsighted, says James Dartez, founder and president of Royce Instrument Corp. in New Orleans. About 18 months after Dartez launched his export business, he cut expenses by pulling all advertising. That produced an immediate monthly savings of nearly $6,000.

“I thought I could save that money and never feel it,” Dartez says. “But when I started advertising again five months later, it was like we had vanished. We had to start all over.”

Dartez estimates it took nine months of new advertising “to get me to where I was before” in terms of regaining lost orders. He wound up spending more than ever to re-establish the visibility he had lost during his self-imposed ad hiatus.

Dartez learned his lesson. When he faced another bout of belt-tightening years later, he cut everyone’s pay 10% — including his own — but never stopped advertising. Today his company generates $8 million in annual sales.

‘It’s what you can afford’

All 90 employees at Z Corp. strive to save money. It’s a big part of the corporate culture, says Marina Hatsopoulos, co-founder and CEO of the Burlington, Mass.-based firm, which makes printers that produce physical 3-D models from computer-aided drafting (CAD) data.

It all starts with the company’s chairman who likes to say, “It’s not what you need. It’s what you can afford.” That frugal spirit has helped drive Z Corp.’s 300% growth over the past two years.

“We’ve made every dollar stretch very far,” says Hatsopoulos. “Once you get used to spending and doing things the more expensive way, it’s hard to pull back.” All work cubicles at Z Corp. are the same size, and everyone — from Hatsopoulos on down — flies coach and shares a room on business trips.

Devoting so much attention to cost cutting improves morale at all levels. Employees notice that the top brass deny themselves cushy perks. And executives can concentrate on running the business rather than raising money.