Return on Expenses - Part Two

By: Donna MacMillan
Submitted: 2007-01-17 12:35:45
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In the last article we discussed cutting expenses on the income side. Let's go to the opposite side of your business now - cutting costs on what you pay out. The first thing that comes to most people minds is discounts on what they buy. Trade Discounts are reductions to your bills for paying early. They are often written as a percentage of the total sale (not including shipping or sales tax) if the invoice is paid within a fixed time period. I am sure you have seen 2/10,net30 on invoices which means if you pay within 10 days of the invoice date you may take a 2% discount or pay the entire amount within 30 days.

This is a standard example, however vendors sometimes use other terms. Your goal is to have relationships with suppliers that offer you the best discounts and terms. There are even some vendors that will increase their discounts and/or terms if you have a better than average credit reputation, do a large amount of business with them or make them your primary source for a particular product or service. Even vendors who do not ordinarily offer discounts should be asked as the prospect of an early payment is always welcome. But if discounts or favorable terms are not available you can improve your cash flow by not paying early. You would, of course, always pay on time but as we discussed in the last article, cash produces income.

Don't give up that income by paying before your vendor's expectations. If you are making a large purchase try to negotiate paying over a longer period of time. To make the sale and keep money flowing in their business, vendors will sometimes extend terms beyond the 30 day standard and often with no interest.

When considering purchasing either supplies or materials, consider carefully what you need, how much you need and when you need them. Take a lesson from the larger companies who specialize in "just-in-time inventory" purchasing. Their plan is to purchase only as much as they need to fill the sales that are in house. They do this with careful planning and negotiating with their vendors to deliver consistently and quickly. By doing this they have better cash flow control, save on warehousing costs and out of date product issues. With some advance planning and discussions with your vendors you can reap the benefits and cost savings used by the "big guys". One expense is often overlooked. When was the last time you took a good look at how was being spent from your petty cash fund? Money in cash form is easily spent with little knowledge of where it went. Lunches, office supplies, postage and all the other little items that go through this fund can add up to quite a lot when looked at over a year's time.

Make sure you are recording each expense as the money is removed from the fund and are reviewing these expenses on a monthly basis. Perhaps there are expenses that could be covered by a once a month check. Perhaps you are missing out on discounts (such may be the case with office supplies). Is the money just disappearing through loans and is anyone tracking those "loan"? In any case if your petty cash fund is $200 and you are replenishing it just once a month that is a $2400.00 annual expense that you may not be analyzing or controlling.

Remember when in business you should be making every penny work toward a profitable bottom line.

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