One of my first jobs was working in a small business. I learned a lot from that business owner. One of the biggest lessons was not to pass over dollars to pick up pennies. What I mean by this can best be illustrated by what I consider one of his “classic” actions. As a small business every penny spent mattered substantially to the cost of each project and doing business. One of the biggest expenses was the printed materials, everything from marketing flyers to the monthly newsletter the business produced as part of its service. Marketing materials stayed essentially the same: a simple black and white, one-page document that described the services provided, benefits of the services and how to contact the business for more information. Now this was in the “old days” before Internet marketing, desktop publishing and laser printers, so print shops were true print shops, in which print jobs took significant time to set up, and substantial setup costs that were required for each job—unless you had an unchanging design and made regular orders. Delivery and shipping costs also applied.
This small business usually distributed an average of 500 flyers per month to existing and prospective customers. They also distributed around 5000 copies of their monthly publication. The setup cost for each of these jobs was the same: around $50.
One day the business owner came in and was excited that he had found a one cent savings per page for the flyer and a savings of ten cents per copy for the newsletter, in a town 60 miles away (round trip 120 miles and 3 hours total drive time). So he would save $5 on the flyers and $50 on the cost of the monthly publication, and would have to pay $50 in new setup costs at the new supplier for each project. So he would be saving on the production costs of each piece of literature … but he would be spending $100 in setup costs, plus the cost of gas and his time (this was a three-person operation)! The total cost for the new vendor was $100 in setup costs, plus $20 for the flyers, plus $2,450 for monthly time, PLUS three hours of travel time (at a calculated $100 per hour) PLUS gas/mileage for 120 miles of $12.00. His total cost for “saving a penny” was $2,892.
Across the street at his regular printer, he had zero setup costs on the flyer and incurred a reduced cost ($35) of setup for the newsletter, since only the interior content ever changed (and not the covers). So his total cost at the existing supplier was $35 in setup fees plus $25.00 for one-page flyers plus $2,500 for the monthly newsletter. Total cost: $2,560.
Comparing the total cost of the out of town “deal” resulted in an increase cost of $332 over his regular vendor.
Did this small business owner save the penny or the dollars? He picked up the penny because when he looked at the cost of the “project” he looked only at the per-copy cost of “saving” of one cent per flyer and ten cents per newsletter.
Today the same type of analysis frequently occurs when organizations look at their options. Total costs of an “opportunity” must be considered, and not just the “obvious” costs.
Another example of focusing on pennies and spending dollars are the businesspeople that spend money on a “bargain” piece of equipment. They can get a “deal” on a new server, computer, copier, chainsaw, backhoe, whatever … but they have to buy it NOW or miss the deal. The only catch? THEY DO NOT NEED IT! Buying the item will not make them more efficient, reduce costs, get more customers, etc. But they saved money on the item! In reality, they spent money that didn’t need to be spent! Look at what was spent and not what was “saved.” If the business $800 spent on a $1600 item that is helped increase profitability, efficiency, etc. then yes, they saved $800. But if they spent $800 on something that really wasn’t needed, then they spent $800!
Be careful when you are making decisions on how to “save” money, reduce costs and budget for your business. The total cost of any action and its impact financially, operationally and strategically need to be considered. Spending money to improve how your business operates, saves time, increases results for your customers or makes it easier to do business with you is a good investment (if you can afford it), and where you spend the money is truly where it will generate results.
A penny saved may be a penny earned. But a dollar not spent is 100 pennies saved and earned!
Author: Lea A. Strickland, MBA CMA CFM CBM GMC
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