Spending Dollars Chasing Pennies
Keep more money in your pocket by wasting less time.
A savvy small business owner recognizes the importance of pinching pennies, watching the bottom line, keeping over head costs under control. Proper money management is the foundation of success. It can easily be the difference between staying in business and joining the 30% of companies who fail in the first year.
Of course, multiple things can cause a small business to fail. Sometimes it’s a poor understanding of the market. Sometimes it’s a lack of planning, or a bad location, or online competition. Even growing too quickly can be the death of a business. All of these are relevant concerns. But one issue small business owners often overlook is cost effective time management. Time is money after all. Through the years I have witnessed small business owners spend dollars chasing pennies.
What do I mean by that? Allow me to illustrate with real life examples of business owners throwing away money when they became fixated on saving a buck.
Once upon a time, I worked as an operations manager for a small business that sold mobile filing systems. During a slow period, cash flow was a problem, and we looked for ways to tighten the budget. My boss thought she could save money by reducing the foreman’s per diem by $10 a day. The company did system installations around the country, and crews traveled frequently. It seemed reasonable to her that saving $10 per day would add up over time, and improve the cash flow.
Unfortunately, she failed to take into consideration the negative reaction of the employee. By shifting a portion of the financial burden to the foreman, the owner lost the respect of the employee. His willingness to leave his family and travel for work was a sacrifice. By lowering his per diem, he felt unappreciated. Resentment soon set in. Instead of keeping all crew members working at the proper pace, he wasn’t motivated to ensure everyone’s best performance, and jobs took longer to complete.
Those extra man hours on a job cost the company far more than $10 a day. Occasionally, the crew stayed an entire day over budget, wracking up hotel expenses, wages, per diem, and taxes. Recognizing the problem, I strongly urged the owner to restore the foreman’s per diem rate. She refused. She was blindly determined to hold on to the $10. Her decision cost the company thousands of dollars in the end.
At another job, I had a boss who was outraged over a fee, and refused to pay the vendor $22. He had me drive to the vendor’s office three times to resolve the matter before it was settled. My wage was more than $22 per hour, and I spend more than two hours on the issue, plus the cost of mileage. When you include payroll taxes, he paid approximately $75 to save $22.
These are both examples of emotional decisions. Not sound business decisions. When running your business, you must set emotion aside, and be sure all decisions make good financial sense.
There are other areas where an owner must consider time investment when establishing business practices. For example, I often teach bookkeeping to new hires with the express focus on performing tasks using the most efficient method, while still maintaining accurate books. Accounting is a meticulous activity. Reconciling bank statements is frequently a place where people will devote significant time trying to find every penny.
While accuracy is important, how much time should anyone devote to achieving zero discrepancy? Remember, time is money. Finding tiny differences can be time consuming. Receipts may come in without a tip added on the cardholder copy. There may be typos in entered transactions. Even the rare bank error may happen.
How do you decide between perfection in accounting, versus wasting too much time reconciling? Consider the cost of the time being spent. I have a simple rule of thumb. If the difference in the bank statement and the books is less than a dollar, do not spend a single minute looking for it. Simply enter an adjustment and move on. Allow a few minutes searching for dollars. Scale up the time spent reconciling according to the dollar amount out of balance. The same kind of evaluation should go into every decision where time is being invested.
As a small business owner, you must continuously weigh costs versus benefit, whether it be wages, customer good will, maximizing buying power with vendors, or balancing your books to the penny. If you want to be in the 25% of businesses who make it past the 15 year mark, don’t be one of those owners who spends dollars chasing pennies.