Spending Less Without Compromising Quality
U.S. Small Business Administration*
"In this world nothing is certain but death and taxes," penned Benjamin Franklin in a letter to a friend in 1789. While death and taxes remain as immutable as when Franklin made his claim more than 200 hundred years ago, several other unyielding realities have entered the American business landscape -- including economic fluctuations, ever-increasing competition and an emphasis on quality. To best cope with these factors, and keep a company strong, it is critical that entrepreneurs constantly review the way they do business, and keep costs as low as reasonably possible without compromising their operations. The areas described below -- phone bills, travel costs, secondhand purchases and leasing -- are prime candidates for scrutiny.
Cutting Travel Costs
Travel and entertainment is one of the largest controllable expenses for many U.S. organizations, after payroll and automation. Here are some practical ways your company can reduce travel costs, which is especially necessary during these recessionary times, without sacrificing a valuable means of doing business:
- Ask "Is this Trip Really Necessary?" - Teleconferencing, conference calls and fax machines can sometimes very effectively substitute for business trips. If you must travel, however, scheduling long business trips with several stops is a more economical approach than setting up a series of one-day trips.
- Have a Formal, Written Travel Policy - Provide clear guidelines and rules for employees to follow when traveling. The policy needs to have top management's commitment and support, as well as the cooperation of all participating staff. Guidelines should include how to arrange for the lowest available prices in airfares, car rentals and hotel accommodations, and require that any frequent flyer miles amassed be used only towards business trips. Exceptions to the rules are sometimes necessary, and it is up to each manager to decide how strictly the guidelines must be followed, and how encompassing they will be.
- Consolidate Your Travel Purchases - When all travel reservations are handled by one agency, the high volume can help in negotiating better rates for hotels, rental cars and airfare. By suggesting a "preferred hotel," to traveling employees, the agency also promotes compliance with the company's travel policy and can reduce costs by as much as five to 20 percent.
- Provide Employees with Charge Cards - Limit reliance on cash advances by providing charge cards to employees who travel. A company's cash advances may also be reduced by limiting the amount of money an employee may spend per day, and insisting on prompt settlement of travel vouchers. Another advantage of charge cards is that they can eliminate complex, time-consuming expense reports. Instead, employees can be reimbursed based on their itemized charge card statements.
- Require Coach Travel - Many companies are now requiring that everyone who travels must fly coach. Because many firms no longer sanction business class air travel, at least one airline now offers mid-class -- an improvement over coach in terms of comfort and amenities yet more economical than business class.
Overall, make sure employees have a complete understanding of the firm's travel policy, and agree to comply with all its rules and guidelines. When the general policy is predicated on employees spending the company's money as if it were their own, staff can be motivated to be just as prudent and cost conscious with their business travel as when planning their personal trips.
Lower Phone Bills
The telephone system is an integral part of daily operations in every business. Although telephone bills are unavoidable, many companies needlessly overspend on their monthly bill for a variety of reasons. It pays to compare rates offered by competing phone companies and analyze your bills to see what calling plans and other options can save you money. Even pennies off the rate per minute can mean significant savings at the end of the month.
- Check It Out! - Phone companies sometimes inadvertently charge companies for calls they did not make or double-bill customers for the same call. As a result, many small businesses are needlessly spending extra money on their phone bills simply because they are not checking carefully for erroneous charges. Catching these mistakes could save hundreds of dollars each year.
- Combat Calling Crooks - Another way that excess calls find their way onto your bill is through fraud. Illegitimate use of phones, calling cards and access codes is a widespread problem and your firm may pay the price if you take no steps to prevent it. A phone company may insist that a business is responsible for the charges on the grounds that the particular organization should have guarded its system more carefully.
- Costly Car Phones - A number of companies attest to the fact that car phones are a helpful tool in conducting business. But are they always worth the cost? For example, many firms have noticed that calls get more extravagant, and phone bills skyrocket, as more employees receive car phones. This trend can be halted by setting a ceiling on car phone charges per month, and charging any amount over the ceiling to the individual user. Another option is to replace car phones with beepers. These methods encourage employees to use pay phones whenever possible, significantly reducing the cost of phone calls on the road.
- Fax Financing - To reduce the cost of sending faxes, some savvy companies have implemented a program in which less important faxes are not transmitted during peak hours when phone rates are higher. With certain fax machines, an employee can actually input a fax that is not urgent during business hours, and the machine will save the text and send it later at the less expensive night rates. Small businesses that send out many copies of the same fax on the same day, such as a company newsletter with broad-based distribution, know that sending all these faxes on their own machine can be incredibly time consuming. An alternative is to let someone else do the faxing. New companies, such as Xpedite Systems in Eatontown, New Jersey, receive faxes via modem and can transmit thousands of copies to recipients in minutes, constantly dialing until they connect with every number. This service costs only 23 to 38 cents per page, and eliminates the need to make a large capital investment in new equipment and phone lines. On the receiving end, companies such as Fax Access Xchange in Dallas, Texas, give a customer exclusive use of one of their phone numbers to be used as the company's own, even storing messages that can't be forwarded immediately. The cost is roughly half the price of a separate fax line.
Avoiding Sticker Shock
Every business periodically makes large purchases, be it a company car, a new piece of heavy machinery, office furniture or a basic copy machine. Because it is especially difficult for a small firm to take on the strain of immediate payment or the long-term commitment of financing caused by these purchases, it makes sense to look beyond buying new. Purchasing items secondhand or selecting the option of a lease can be economical and sensible alternatives.
What to Buy:
- Industry-specific equipment is often of comparable quality whether used or new. However, find out why the seller no longer wants it, and thereby avoid purchasing someone else's problem.
- Office furniture can be extremely costly when new, and a bad investment if quality is poor. The authenticity and condition of furniture should be carefully examined before buying.
- Computers that have not failed during the warranty period are not likely to fail afterwards. Companies may sell a system simply because they have outgrown it, or want to upgrade their equipment.
- Dependable, standard-use items such as store fixtures are less likely to break or become unusable.
Where to Buy It:
- Classifieds in trade magazines or newspapers are sometimes extremely useful. However, because anyone can place an ad, be sure to inspect potential purchases first-hand.
- Dealers often have an interest in making a reputable secondhand sale. Some offer reconditioned equipment and/or guarantees. Be careful, however, and investigate the dealer's reputation so as to avoid fly-by-night operations.
- Auctions from bankruptcy liquidations are excellent places to buy high-quality merchandise at a fraction of the original retail cost.
- Word-of-mouth works especially well in locating sources for specialized equipment.
- Government agencies sometimes dispose of merchandise and property in conjunction with liquidating loan collateral after a default.
How Much Will You Spend:
- Compare with an equivalent new item and discount at least 50 percent.
- In buying scarce industrial equipment, remember that additional costs for search and inspection may be incurred (such as paying a broker to find it), which a new item would not have.
- Another thing to keep in mind is that there may be fewer tax benefits on used equipment. Ask your accountant to investigate, and factor this figure into the equation when weighing your options.
- Delivery may not be included. Be sure to check before you buy, so you can add delivery charges to the total price, if necessary.
- Plan for upcoming needs by shopping in advance (during an off season, for example) when excellent deals are available.
A Leading Edge with Leasing
Advantages over Purchasing:
- Spreads out payments. Full purchase price or down payment can overload a small firm's cash flow.
- Avoids debt liability that can hurt your credit rating.
- Provides an opportunity to try out expensive equipment first to see if it fits your needs.
- A lease contract with upgrade options enables a company to take advantage of rapidly changing technology.
- Gives the option of moving on to more powerful equipment to accommodate rapid growth of a business.
- Ideal for cyclical or temporary needs, as purchased equipment sits idle during off periods.
- Avoids the more stringent credit requirements for borrowing. While banks usually require three years of operation before they will lend, companies can be creditworthy for leasing in as short a period as six months.
Ask These Questions:
- What is the amount of each individual lease payment?
- What is the total amount to be paid over the term of the lease?
- Can the lease be closed sooner by increasing the amount or number of payments?
- Do any penalties exist for canceling the lease early?
- Is there an option to buy at the end of the lease?
- Does a more expensive lease mean that the item will cost less if you later take up the option to buy?
- Are discounts available for high-volume lease agreements?
- Is a security deposit required?
- Is insurance included in the lease and if so, what is the charge?
- Does the lessor provide service on the equipment? Is there a charge for such service?
- Does the equipment comply with all local regulations? Are there taxes or environmental permits to consider?
Cutting costs is not an impossible feat for small businesses – it just requires research, organization and planning. With the strategies outlined here, entrepreneurs can make significant strides in keeping a company's expenses more manageable.
*Excerpted with permission from "Small Business Success" magazine, Volume 7, produced by Pacific Bell Directory in partnership with the U.S. Small Business Administration and the Partners for Small Business Excellence.