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‘... If you watch the pennies ...’

Inside Business

Posted: April 24, 2008 6:30 p.m.
Updated: June 24, 2008 5:02 a.m.
 
It is always a good time to keep an eye on costs in an organization. Financial reporting is a great way to look back on what happened; it is more important to look forward to see what can be proactively addressed.

There are three areas to focus on regarding controlling expenses. The first is keeping a lid on what employees spend; the second is being open to revisiting direct costs; and the third is finding ways to reduce indirect costs.

An early mentor explained, demonstrated and proved the results of his philosophy about watching what employees spend. While running one of the smallest divisions in a billion dollar corporation, "Wild Bill"
Sweeney scrutinized and challenged the expenditures that impacted his bottom line.

Nothing was too small for him to question. When reviewing an expense report for one of the managers who reported to him, Bill asked, "Do you have appetizers at home on Tuesday night before you have dinner with your family?" The manager replied back that he did not eat appetizers at home, and Bill said, "Why would the company pay for you to have both appetizers and dinner just because you are on the road? You can have drinks and appetizers or you can have drinks and dinner, but from now on, you won't do both. If you watch the pennies the dollars will take care of themselves."

"Wild Bill" proved that there was a method to his madness: His division, though small, was year in and year out the most profitable division in the corporation. Bigger isn't always better in the business world, keeping costs down and making the business profitable matters. Bill did this through leading by example, setting and enforcing standards.

Volume Incentive Plan
What Bill didn't say, but wisely demonstrated, was that every employee has the capability of spending more of the company's money than might be prudent, if left unchecked and unmonitored. As one business owner stated, "Every employee believes they have a license to spend the company's money."

While most companies think that they do a superior job of controlling direct costs (core expenses), many could benefit from learning what takes place in other industries. All too often people scoff at ideas that come from the outside, but industry blindness breeds arrogance and decline.

That narrow minded thinking can be expensive, both short term and long term. Starbucks looked to the quick serve/fast food industry to standardize its "daily blend" offered each day. This reduced costs in every store and reduced the No. 1 complaint of customers which is waiting in line. The movie industry has started to implement assigned seating in more upscale theaters, something it learned from the airline industry.

A business owner in the food industry commented that he was seeking to create a Volume Incentive Plan to present to his vendors where the more he purchased from them the more his vendors would rebate him. That idea was quickly jumped on by an owner in the distribution business who had never considered asking his vendors for any kind of rebate program on core purchases.

The lessons are clear: Don't be afraid to learn what others are doing to reduce core costs and don't be afraid to ask for something that will reduce the direct costs that impact gross profit.

Kevin Rumsey speaks regularly on the subject of reducing expenses. According to the research conducted by Alliance Cost Containment, the average company spends 20 to 30 percent more on procured goods and services than is necessary.

Copying expenses
Indirect goods include office supplies, janitorial services and supplies, fuel, travel costs (hotel, airfare, car rentals), insurance of all types, utilities, printing, shipping expenses, telephone and communications charges, computer supplies, pest control, temp services, uniforms, furniture, payroll services and many more. The paperless office never came to fruition because paper sales have never been higher; growing at almost 15 percent per year and printers, copies and expensive ink cartridges are right behind.

The average company spends 3 to 5 percent of its total revenue on document imaging alone, which includes copying, printing and faxing. In many companies, personal use of the printers and copiers account for a majority of the use of paper and ink. Color copying runs 2 to 4 times the cost of black and white. Having the default setting on every copier to black and white and using less expensive copy paper will result in immediate savings.

Another effective way to save money is to start turning off lights and computers when not in use.
Putting timers and motion detectors on lights and putting the HVAC system on a timer can't hurt. To sweeten the pot, many utilities have rebates and other incentives to help organizations reduce energy costs.

Kevin stated in his presentation, "There are few areas in which to save $1 million, but there are a million areas in which to save $1." There is no time like the present to start watching where the pennies are being spent.

Kenneth W. Keller is president of Renaissance Executive Forums, bringing business owners together in facilitated peer advisory boards. His column represents his own views and not necessarily those of The Signal.

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