Procurement: The Cost Side of Your Profits
Small business owners decide when and how to spend money on their businesses. Knowing the “why’s” and the “what’s” of business spending can make a significant difference on your profits and on the value you acquire.
There are plenty of legitimate reasons to spend money. Here are some of them:
- Asset Investments – Land, Equipment
- Goods For Resale – Considered Cost of Goods (COGS)
- Compensation – Payroll, Payroll Expense, Workers’ Comp, Medical Insurance
- Business Operations – Administration, Training, Promotion, Marketing and Sales
- Project Expenses – Transformative Projects, Research
Each kind of spend requires you to think about why, what and how much quantity to purchase. That requires identifying what purpose the purchase serves. Here are some examples:
Asset Investments – These purchases are generally long term and will go right onto your balance sheet. Let’s say you have the capital on hand to purchase the physical space you need instead of paying rent.
Years ago, this decision was a “no brainer” for businesses that could afford it. Today, the decision to buy property for your business may still be a good idea but the decision should be challenged:
- Do you really need geographic specific physical space?
- What location should you choose and can you afford?
- What size space should you consider? What impact will growth have on the space you choose?
- Do you need space for all of your staff or will some be working remotely?
- What will the acquisition and improvements cost?
- What will utilities, maintenance and property taxes cost?
- Will growth related immobility negatively affect your purchase?
Goods For Resale – These purchases may be for reselling “as is” or may represent intermediate or raw material purchases. Some of the criteria to help decide are:
- Quality and Availability
- Branding or Co-branding Opportunities
- Vendor Price and Reputation
- Vendor Quality of Service (how fast they can ship the correct orders)
- Vendor Payment Terms
- Volume Purchased
- Competitive Markup Opportunity
- Multi-sourcing Opportunities
An important factor when buying goods for inventory are “days in inventory.” The fewer days, the better. This goes to the frequent question about the “number of turns” an inventory quantity or class will have per year. The more turns the better. This means that you are gaining a products margin several times per year.
Compensation – For most businesses, compensation is the number one or two highest operating expense. Hiring the right employee for the job and retaining that employee is critical. In the United States, there are statutory requirements that generate compensation expenses above and beyond salary and wages. These are:
- Employer portion of Social Security
- Employer portion of Medicare
- Federal Unemployment Tax
- State Unemployment Tax
- Workers’ Compensation Insurance
- Health Insurance where required by AFA.
Then there are optional expenses that you may wish to offer. Some of these are:
- Health Insurance
- Dental Insurance
- Disability Insurance
- Tuition Reimbursement
Often employers offer the use of equipment that is directly related to employees doing their jobs. Frequently, employees see these as “perks.”
- Company Auto
- Company Mobile Phone
- Company Laptop (Hardware, Software and Internet Access)
Business Operations – There are many recurring purchases required to start-up and operate a business.
Start-up promotional and marketing expenses can be many. Here are some:
- (Newsletter, blog)
- Public Relations
- Business Collateral design, printing and distribution
- Sales Training
- Trade Shows
- Memberships at Associations
- Travel (client meetings, meeting vendors, networking)
- Google Ads/Facebook Ads
- Mailing lead lists
- Memberships (Chamber of Commerce etc.)
- Domain Name
- Website Hosting
- Website Design
- Website SEO Optimization
Start-up business operations may include:
- Initial Inventory
- Professional Advice
- Attorney review, preparation of term-sheets
- Audit of financial statements
- Business advice
On going operating costs might include,
- Equipment Lease
- Maintenance and Repairs
- Property and/or liability insurance
- Office Supplies
- Staff Training
- Vehicle Expenses
- Travel (Parking etc.)
- Utilities (Electricity, Gas/Oil, Telephone, Water)
- Professional Fees (Legal, Bookkeeping)
- Internet Hosting
Project Expenses – usually are one-time, non-recurring expenses designed to change the status quo. These can be longer (capital) projects or shorter term projects meant to solve a problem, fill a need or achieve an opportunity.
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