A penny saved is not a penny earned. To business owners, a penny saved is a nickel, dime, or more earned. Let us explain: If you have a 10% profit margin, you need to generate $1,000 in new sales to net the same profit as cutting $100 in expenses. Thus, a dime saved is a dollar earned.
No cost cutting necessary
You may not need to trim a single expense to improve your bottom line. You can do it by just ensuring that you are paying only what you agreed to.
We were reminded of this on a recent business trip to Florida.
Four days found four errors on our hotel bills – all honest mistakes (we think). There was the $0.95 charged for a phone call never made, $11 for the $7 glass of wine, $26 for the “free” breakfast, and $160 for an extra night’s room charge.
You may think that the roughly $200 in erroneous charges is chump change. C’mon!
Questioning a $0.95 charge? Consider this: A business with a 5% profit margin has to generate $4,000 in sales to just to cover this $200 in bad bills.
Consider this: It’s not the amount of the mistakes that is significant, but the number of mistakes. We averaged one a day during our short trip. How many occur in your business? More importantly, how many go unnoticed? And how much is it costing you?
Paying attention pays off
Do you, or does someone in your organization, look at each bill, statement, or invoice before paying it? If not, start now.
Most of the time, it is as simple as reading and checking carefully to make sure the charges are correct. When we pointed out the errors, everyone was apologetic and gladly corrected our bills. Of course, had we not checked, we would have been out the $200.
Other times, it requires a little more digging, but the return can be dramatic. A company that specializes in auditing department store income from cosmetic vendors told us that it is not uncommon for them to find a million dollars or more the first year that they work with a major store. What we found surprising is that, when they come back to audit the following year, they frequently find the exact same billing mistakes.
The lesson? Fresh eyes can lead to astonishing results. However, to have lasting impact it requires training, emphasis, and accountability.
Four different employees each thought they were in charge of ordering toilet paper for a large retail store. Guess what? They had no room for inventory, but a lifetime supply of toilet paper.
When more than one person is responsible, then no one is accountable. Be as clear in assigning responsibility for spending your money as you are in all other aspects of your business.
Expect and inspect
Schedule reviews of your vendor agreements and compare the actual invoices to the contracts. Pick one or two each month or week (depending on the number of vendors you have). As with all good habits, saving money requires discipline and a rhythm.
Generate variance reports. Most accounting software will do this for you. A variance is simply the difference between what you expected and what you really received. If you expected something to cost $7 and it, in fact, cost $11 (like our glasses of wine), then you have a variance of $4 per item more than expected.
Insist that anyone responsible to verify or approve a bill sign or initial it when they do so. There’s loads of psychology behind this. Don’t accept anything short of a personal mark. A signature on a document is a pretty good signal that eyes were on it as well.
Trust but verify: It’s the easiest money you’ll ever keep.
For the next 90 days, follow our suggestions and see how much money you find. Track it and let us know.
Originally published in CBS MoneyWatch as “There’s Gold in Them There Bills” on January 30, 2012.
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