Thursday, January 8, 2009

No Costs Are Fixed

My first year in business was bewildering. The various services necessary to run a business took some effort to figure out and pull off at the right time. Insurance, credit card processors, telephone and Internet, payroll and accounting, and even the almighty lease all had to be properly budgeted and planned. The following year, when I went to a seminar at the GAMA Trade Show given by Dave Wallace, I learned that these expenses should be reviewed annually and carefully scrutinized. I had a sinking feeling that maybe running a store wasn't right for me, or maybe this guy was insane. He had all these crazy numbers he kept throwing at us, as if he had the magic formula for running a game store. In fact, he kinda did.

He was not insane, it turns out, and my vision of what it meant to run a business back then was still in fairy tale land. There's really only two things you need to do: sell more stuff, and spend less money. Everything else flows from those two things. In the beginning of a business, with double digit sales increases, the first part seems like a no brainer. The second part, saving money, seems irrelevant when the cash is pouring in. In fact, I realize now that it took me about two years to come to the important realization that the money I was spending on all these various expenses, was mine.

As an IT employee, especially one running a "cost center" like an IT department, money was this dirty stuff that the finance guys handled. A smart company has IT report to finance because techies are like kids in a candy store. It didn't help that I did IT during the dot-com days, when we would be judged on our burn rate, our level of spending regardless of results. The finance guys would make us do a budget every year, but then they would ignore it. They wouldn't require budget discipline on my part, and there was never an upside to creating a budget, such as a surplus that I could use to buy some fancy router.

Money was always abstracted. If they had no money, they would just deny a purchase order, like momma saying no to a candy bar, without much explanation. It took me two years running my own business to unlearn this bad behavior, and then, suddenly, overnight, saving money became fun. This was my money, money that I used to feed my child and fill my car with gas. Everyone suddenly had their hand in my pocket and I didn't like it. I nearly became a Republican on the spot! Really what happened is it became a big game. THE game.

So now I kind of enjoy the annual task of going over expenses and seeing what I can squeeze, just a little more. Last year I cut payroll expenses in half and stopped buying custom printed bags. The year before I met a customer in the store who became my insurance agent, saving me a bundle on insurace and thousands of dollars a week later when the store was broken into (the agency still wonders if I did it). Today I cut my phone bill in half by dropping voice mail, a phone line that wasn't getting used, and changing my DSL service. AT&T even gave me the equivalent of three months worth of free service, since I showed I wasn't fully using my plan. That's the equivalent of five days net profit from store sales. It pretty much takes ten dollars in sales to cover one dollar in expenses, so any savings you can make are enormous!

I'm not entirely ruthless. I will often try to give business to customers or people I know. I'm switching credit card processors to a friend from high school. My aunt does my personal insurance, while a friend from the store does the business insurance. My accountant is a networking associate of one of my business partners. The guy who represented me to the landlord plays Magic with his son. I even bought janitorial supplies from a guy who frequented the shop, even though it took two years to go through the minimum order of hand soap. It's not just a tit for tat trading of services. When you have a relationship with people, they usually provide you better service.

7 comments:

  1. I think this is one of those very basic business lessons that bears repeating over and over again because it's so basic that it often gets overlooked.

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  2. Am I repeating myself again? ;)

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  3. "No costs are fixed"

    Yet it appears that some costs are broken...

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  4. Working for yourself is a whole different ballgame w/r/t saving money and feeling like your contribution is worth something.

    Years ago, I made some changes where I was working that saved them > $70,000 yearly recurring for at least 5 years. It took me two weeks and a one-time equipment cost of ~$2,500. (And the equipment could be re-used on other projects later.) My salary at the time was considerably smaller than the recurring savings.

    I made that change shortly after my 'boss' (interfering and incompetent) was promoted, so I was allowed to do the project. He had said that what I wanted to do was impossible and not worth attempting.

    Did I get a raise? No.

    I got a thank you.

    If I did something in my own life that would result in a $70,000 positive cash flow recurring yearly for a two week $2500 investment, I would have to clean my pants before I went on vacation.

    Tim

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  5. While in the Army, I discovered an inefficient and duplicated process in my workplace that often required me to be out of the workplace for several hours a day, and work extended days. When I worked out a solution that ended the duplication and streamlined the process - saving over $30k in materials and about 1k man hours per year (not part of the DoD cost/benefits analysis when you are talking about enlisted people's time), I was not given a raise or bonus, or even a thank you. Instead, I was accused of being lazy and threatened with an article 15 if I tried to claim a reward under the DoD suggestion program.

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  6. The larger the organization, the greater the bureaucratic inefficiency and inertia.

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  7. One thing about using friends and customers to be aware of: If you do a review every year, you may find a better deal. And you then may be loathe to change to this better deal, even if your friend says "It's the best I can do", and it's still more than what you got elsewhere. So you need to be steely, and be willing to and able to either a) pay more and not rock the boat in your relationship or b) rock the relationship, but save some money.

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