We’re all in business to make profit—well, unless you’re a non-profit, in which case you still want to make money and won’t classify it as profit. You’ve probably heard that you need to spend money to make money, assuming that to make more money your business needs to grow. Growth happens through marketing, opening new offices, hiring more employees to attract more clients, etc.
But pure growth isn’t the only way to become more profitable.
Over the course of my career as a business owner, business services provider, and consultant, I have developed a simpler way to break down the universal goal of increasing profitability.
- Decrease expenses
- Increase revenue
- Manage cashflow
- Mitigate liabilities
It’s simple. As you decrease expenses, your profit increases without having to bring in new business. Also, by examining your current expenses, you’ll find ways to simplify what you pay, at what rate, and when. Liability mitigation doesn’t really fit in this profitability eco-chain, but it’s still in area of process improvement that I’ll touch on a later article.
Thinking of profitability this way, as four processes, will clarify and categorize how your firm can become more profitable. Imagine how impressed your partners will be when you come armed with a four-pronged plan to increasing profitability by 30%.
And that percentage isn’t far-fetched. I’ve seen it happen. Just like tuning a car, making small tune ups to the engine, breaks, and fuel exhaust will have a combined effect of increasing the overall performance of the car.
In this article, I’d like to focus on one area of process improvement: decreasing expenses.
Anyone running a house knows that cutting expenses is the first step to financial stability. Ready for another metaphor? If you want to lose weight, the first thing you do is eat healthier by cutting back on your fat and sugar intake. That’s what you’re looking for when you want to decrease expenses. Where’s my fat? Or where am I spending too much money?
And you’ll probably find savings where you least expect them.
I recently reviewed a credit card statement for a potential—now new—client. They were reluctant to show me. They were happy with their current provider and believed that they were getting a good deal. Once we dove into their fees, line by line, we quickly found 38% savings through better rates and better technology. 38%!
They were shocked! This one example reminded me of the importance to regularly review and bid out your services. If you have contracts, the renewal year is a good time to shop around or have the current provider send another quote. Leverage your longstanding relationship or the fact that you are looking at other providers. Doing so will keep your provider honest and their prices competitive.
If you don’t have a contract, pick a date and time to take a look at these. Managing any business is time consuming and stressful. At times, even the best managers become comfortable with their current vendors. Remember, an agreed upon price that was a great deal three years ago might be inflated now. New technology, new competitors, or a change in ownership can drastically change a pricing program.
Below are some steps and ideas to help you manage your current relationships and build new ones to decrease expenses. Try them out with your banking partners, internet and phone providers, payroll companies, credit card processing, or software providers.
Steps and techniques to follow.
- General Review. Find the current pricing, contracts, and any other supporting documentation for all your vendors. Then decide what you hope to achieve. Do you want to reduce costs or redefine the scope of service? Maybe there are new standards or requirements with which you need to comply. Does your current vendor meet your expectations or are there gaps in service that need to be addressed? If you are unhappy with the current relationship, this is a great starting-off point for renegotiation. Even if you’re happy with the vendor and believe that they meet your service needs, it’s good practice to hold a regular general review.
- Service Requirements. Whenever you set out to work with current or potential vendors, you’ll want to make and keep a list of requirements, such as payment terms, desired discounts, integrations, customer service accessibility, etc. Doing this can help maintain a friendly working relationship with your current vendors because everyone knows where the line is at. The vendor will bid for the services that your firm needs and you shouldn’t see any unexpected cost increases because the “scope has changed.”
- Developing a Scorecard. This technique is a little time consuming, but it’s invaluable to managing vendor relations. A vendor scorecard is one that breaks down the vendors entire offering (price, customer service, product features) and grades each one. Each line will actually get two grades: one from you and one from the vendor. This is a great way to see how each of you views the relationship and the quality of the product. Your scorecard has the dual effect of making you drill down your must-haves, the items that are mission critical.The overall grade gives the vendor a chance to leverage other services and features, instead of driving down the price. While you want to save money, the vendor wants to make money, and there will always be bare-bottom price for the vendors. Reaching the floor may save your firm money, but it may also sour the relationship with your vendor and hurt your service in other ways. Having this scorecard gives you and the vendor more cards—other than price—to play with and find value.
- Decision by Committee. Never negotiate in a silo. Changing vendors can dramatically affect an organization, so it’s essential to receive different perspectives and inform other colleagues.
- Select Your Short List. Work with them to find additional cost savings from outside the scope that they were originally provided. Vendors will have other ideas or proposals for cost savings that they don’t present initially. Why, you ask? Because it may cause their bid to not be equal to their bidding competitors and skew the bidding process. Vendors know that and won’t put all of their cards on the table at once.
Also take your time to make sure you understand the terms and conditions, scope of work, final costs, and payment requirements. These details can set vendors apart when making a final decision.
- Finalizing Contracts. Finally! You’ve put yourself through a thought and time intensive process, but it’s all worth it because you scored an excellent deal that saves money and improves your overall experience. Before signing anything, make sure your agreements state everything that was negotiated. Don’t let verbal agreements remain verbal.
Following these basic steps can get you started in reducing your firms costs and building stronger vendor relationships.