- THE MAGAZINE
While the old axiom of you have to spend money to make money is certainly true, it isn’t just simply the act of spending money that creates earnings. Although it’s necessary to purchase equipment and supplies to perform the services we sell, it seems obvious that the less we spend for these supply items, the greater our profits will be. But is that necessarily the case? Lets look at some of the things that affect this important part of business.
Price vs. ValueSometimes the lowest price does not equal the best value. Buying the least expensive equipment or chemistry may actually end up costing you more. Make sure you understand why the product is less expensive. If it makes you work slower because it is less efficient than the more expensive version, the extra time might be more costly than the price difference. Remember, labor is your greatest expense in a service company and even a small labor savings is valuable. Sometimes chemistry is priced lower because it’s less concentrated; thus, making the cost for the diluted ready-to-use product higher. Evaluate your equipment and chemicals in terms of productivity and not only on price.
Volume and "Just In Time" PurchasesBuying a single gallon of cleaning agent will certainly have less immediate impact on cash flow than buying a case. However, if you use the product in a reasonable time period, then the price per gallon will be less in the case purchase than the individual gallon price. Added to this is the cost of several trips to the supplier or several shipments as opposed to one. The key is to balance the purchase with the rate of use.
The ideal scenario is to run out of product the day the new supplies arrive. This “just in time” philosophy has some dangers attached. Sometimes, supplier availability and/or lead time is not as expected. Occasionally, business has unexpected surges and your rate of consumption is faster than expected. There are even times when “Murphy’s Law” takes over and things just go wrong without prior warning. While some of these challenges cannot be anticipated, many can be avoided by building a cushion into your ordering system.
First, determine the normal lead time for supply orders to arrive. Next, using your expected rate of usage, determine the latest you can order for “just in time” needs. Back up from there, about half the lead time, and that’s your reorder point. Each time your supplies reach the level equal to 1-1/2 the amount needed during the normal reorder period, place your order for the next amount.
Remember, your rate of usage will vary with the flow of business. Any seasonal fluctuation in business must be taken into consideration. You don’t want to stockpile supplies in the slow season, and you certainly don’t want to run out in the busy season. Rush shipments from suppliers can be costly.
Planned Equipment PurchasesEven the best equipment has an effective life span. Proper maintenance and care can increase its life, but all equipment eventually wears out or becomes obsolete. Keep commonly needed repair and replacement parts in stock and initiate a planned preventive maintenance program to minimize downtime. Broken down equipment costs three ways:
- Cost of repairs
- Lost production
- Loss of reputation and customer trust.
Not being able to get the job done when promised may be the biggest cost of all in the long run.
Start an equipment account that is tied to production volume. For example, you could put 3% of the gross amount produced by a truckmount into the equipment account each month. A truck producing $10,000 per month would build the account at a rate of $300 per month, or $3,600 per year, or $36,000 in 10 years (plus interest if it is the right kind of account). Money is available for “emergency” repairs, and when the time comes to purchase new equipment or replace old machines, the equipment account is there to help reduce the purchase price and reduce the amount paid in finance charges. The reason it should be on a percentage is that the bigger your business, the more equipment costs you will have. Also, the bigger the business, the greater the account becomes.
If your business plan calls for a sharp growth, don’t forget to budget in the cost of good equipment to accomplish the growth. Arrange the financing with your banker before going to the supplier. You’ll often get better rates from the banker who knows you and your business than from a stranger.
Yes, you need to spend money to make money, but spend it wisely and save money as well.