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Consider Options to Minimize Operating and Payroll Costs

Filed under Cash Flow. Fact checked on May 24, 2012.

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Making smart fiscal decisions is a large key to improving your cash flow, but cutting your operating costs is equally important. Discover what outsourced services and operational changes can reduce your operating costs and improve your cash flow.

The best way to improve your cash flow, and in particular to improve your accounts payable situation, is to minimize your business's operational expenses and to make sure that you make the most efficient use of every dollar you spend. Finding ways to perform necessary functions that reduce your transaction costs for necessary business functions that aren't core business activities is the key.

Today, businesses of all sizes are spending more and more time trying to cut expenses to improve the bottom line—or just to remain competitive. Your business should be doing the same. To get you started we're offering a few suggestions that may help you minimize some of the expenses you may incur in your business:

  • service contracts
  • cooperative advertising
  • outside bookkeeping services
  • stop the weekly payroll
  • outside payroll processing

Determining if Service Contracts are Good Investments

When purchasing office equipment, you'll often have the option of purchasing a service contract on the new equipment. In fact, sellers will often go out of their way to try to get you to purchase a service contract. The main reason for this is that the profit margin on the service contract is often greater than the profit margin on the piece of equipment you're purchasing.

A typical service contract will cover the cost of repairing and maintaining a piece of equipment over a certain period of time. Some service contracts can be renewed, while others automatically renew when the contract expires.

If you're like most consumers, you've probably purchased a service contract simply because it made you feel safe and secure knowing that your new office equipment will be fixed at no cost if it should ever break down. After all, you've just spent a considerable amount of money on a new piece of equipment—a few extra dollars for a service contract can't hurt. But in most cases, the extra money you spent for the service contract is wasted money.

Before purchasing or renewing a service contract, consider the following suggestions to help minimize your expenses. You may be able to eliminate the service contract all together, or at least reduce the cost if you do decide to purchase one.

Avoid Contracts or Agreements on Highly Reliable Equipment

Purchasing a service contract on a piece equipment that is highly reliable is an unnecessary expenditure. Much like how car warranties usually only cover the more reliable parts, purchasing service agreements for fairly reliable equipment such as computers, fax machines, telephones, and laser printers is generally a waste.

In some cases, the cost of the service contract is actually more than it would cost to simply have the equipment repaired at your own expense. Keep in mind that the cost of new technology often drops dramatically in the year after you purchase it, and by the time it breaks, you may be able to purchase a new one for half the price of the original. 

Purchase or Renew Contracts or Agreements for Less Reliable Equipment

That's not to say service agreements are categorically bad. For equipment you consider less reliable—ones you use more frequently, and that tend to be more susceptible to breakdowns—service contracts can be to your advantage.

The office copier is the ubiquitous example of the less reliable equipment you'll likely benefit from. The cost of a service contract can be very reasonable if you compare the cost of routine maintenance and repairs with the actual cost of the service contract.

Don't Pay for "House Calls"

If you do purchase a service contract, make sure you know what kind of service you're actually paying for. Sometimes you will actually be paying for more service than you really need. 

For example, some service contracts will cover the costs of house calls—here the service representative or repair technician actually comes to your place of business to service or repair the equipment. This feature may be necessary if the covered equipment cannot be moved or easily disassembled and carried to the nearest repair shop. But for those pieces of equipment you are able to transport to the nearest shop, you may be able to reduce the cost of the service contract by as much as 30 percent to 50 percent by opting out of the house call feature in your contract.

Avoid Long-Term Service Contracts

Before purchasing a service contract, determine if the price is refundable in case you should happen to sell or replace the equipment covered by the contact. Chances are the amount you will pay for the service contract is not refundable. 

Before purchasing a four-year service contract on a machine you only plan to keep two years, do your homework. Purchasing a long-term service contract is cheaper than a short-term contract when you consider the cost of the coverage on a yearly basis. If you plan to keep the covered equipment for the full term of the contract, then you'll benefit more from the long-term contract and its yearly lower coverage cost. If you cannot safely assume you'll keep the equipment for the contract's full term, then it may end up costing you more than a short-term renewable contract.

Also remember to check the warranty on the equipment before purchasing a long-term service contract. The warranty may actually cover the costs of any repairs also covered by a service contract. In this case, purchasing the service contract is completely unnecessary.

Consider Other Ways to Reduce Operating Expenses

Yes, you can even reduce the cost of advertising without necessarily affecting the frequency of your ad campaigns. Through cooperate advertising—a cost-sharing arrangement between you and your suppliers for your advertising—you can split the cost of advertising with another party who will benefit from your success.

The rules and policies for each cooperative advertising arrangement will vary for each supplier. However, one feature common among all cooperative advertising arrangements is that you must prominently feature the supplier's product or service in your advertisement. 

A typical cooperative advertising arrangement works like this:

  • Each time you purchase the supplier's goods or services, you earn a certain number of cooperative advertising credits—generally the credits amount to 3 percent to 5 percent of the total purchase price.
  • You can then use these credits to offset the cost of any advertising that meets the approval of that supplier.
  • In some cases the supplier will only pay up to 50 percent of the total price of the advertising.

How Cooperative Advertising Works

Any supplier that has a cooperative advertising program will most likely have certain guidelines that you must follow in order to take advantage of the credits you've earned. These guidelines include such things as specifying the size of the ad, the location, and of course, making sure you exclusively feature their product or service (e.g., "Featuring XX Brand Computers"). 

Many suppliers will even provide you with copies of the print advertising or scripts for TV and radio advertising. Depending on the supplier, you may be required to use their advertising copy or script in order to qualify for a reimbursement. It's always good to have the supplier pre-approve the advertisement layout whenever possible.

Reimbursement for the cooperative advertising can occur in one of two ways. First, you might have to pay the full amount of the advertising up front, and then provide the supplier with a copy of the ad in order to receive a reimbursement for their share of the advertising cost. 

Second, some suppliers may issue you credit memos equal to their share of the advertising cost and reduce the cost of any future purchases with the supplier. This will certainly entice you to continue to do business with this supplier!

Example

Roth Office Supply is an authorized reseller of Quick Computers—a well-known company that manufactures computers. Quick Computers has a cooperative advertising program available to all its retailers like Roth Office Supply. Quick Computers has provided Roth Office Supply with the guidelines that must be followed in order for their Yellow Page advertising to qualify under the cooperative advertising program.

Roth Office Supply earns a 3.5 percent advertising credit on each purchase of computers it makes from Quick Computers throughout the year. The maximum credit that Roth Office Supply can earn is $2,500 during one year. Quick Computers will pay up to 50 percent of the cost of any single Yellow Page advertisement.

During the past year, Roth Office Supply purchased $37,000 worth of computers from Quick Computers. Therefore, Roth Office Supply earned $1,295 in advertising credit ($37,000 x 3.5%).

The cost of Roth Office Supply's Yellow Page advertisement for the next telephone directory was $885. Since Quick Computers will pay up to 50 percent of the total cost of the Yellow Page advertisement, Roth Office Supply will be reimbursed for $442.50 of the Yellow Page advertising cost ($885 x 50%). Roth Office Supply still has an additional $852.50 in advertising credit it can use to purchase other Yellow Page advertisements ($1,295 - $442.50).

Outside Bookkeeping Services and Less Frequent Payroll Can Save Money

To succeed in business, one of your most important tools is financial analysis based on your business records. The importance of good records cannot be stressed enough. Accurate and timely financial records can help you answer some very important questions, such as: 

  • Are you making money (or losing money)? How much? 
  • Is your business financially sound?
  • Are troubles lurking ahead?

Bookkeeping is the process in which all valuable financial information is gathered and recorded. Using an outside bookkeeping service may improve your financial records and minimize your expenses at the same time.

To determine how much you spend on your bookkeeping, consider the following questions:

  • How much time do you spend doing your bookkeeping?
  • How much money do you have invested in bookkeeping equipment (computer, printer, accounting software)?
  • Are your financial records accurate and in good order?

These questions may be difficult to answer, but answering them may help you realize the savings that can be achieved by letting someone else handle your bookkeeping chores.

When Outsourced Bookkeeping Makes Sense

Outside bookkeeping services already have the knowledge and equipment needed to manage your books. It shouldn't surprise you that they may be able to do your bookkeeping much cheaper and more quickly than you. 

Hourly bookkeeping rates generally range somewhere around $25-$40 per hour. Selecting an accountant to do your bookkeeping will cost you more because accountants tend to offer a broader range of services and expect more compensation accordingly. 

Your total monthly bookkeeping charge mainly depends on the type of services you request and the financial information you provide to the bookkeeping service. A copy of a neat and orderly check register, as opposed to a shoebox full of canceled checks and receipts, will require less work on the part of the bookkeeping service and lower your costs significantly. All in all, you should be able to get accurate and timely financial information from an outside bookkeeping service for less than $200 a month.

Using an outside bookkeeping service will also reduce your tax return preparation fees because neat and orderly financial records make preparing a tax return much easier. Poor financial records will certainly result in your accountant charging you higher return preparation fees.

Stop Your Weekly Payroll

Unfortunately, many small businesses continue to pay their employees weekly. Payroll processing and administrative costs for small businesses are quite high mainly because small businesses don't have the sophisticated payroll processing systems that larger businesses with a greater number of employees can afford. 

Paying employees weekly only compounds this already expensive process, not to mention the time spent by you or your employee preparing payroll checks and updating payroll records. Stopping the weekly payroll routine will definitely minimize your expenses, provided that your state law doesn't require weekly paychecks.

Switching to a bi-weekly payroll can reduce payroll processing and administrative costs by 20 percent to 50 percent, a significant decrease just by reducing the number of payroll periods. Switching to a bi-weekly payroll can also improve your cash flow since it allows you to defer the payment of payroll.

Consider Outside Payroll Services, and Work to Fill Cash Flow Gaps

The IRS's payroll tax deposit rules are becoming more strict with each passing year. This is the IRS's answer to making sure that all withheld payroll taxes (federal withholding, Social Security and Medicare taxes) are deposited in full and on time. Even the most careful small business owners can fall prey to one of the IRS's costly penalties for failing to deposit withheld payroll taxes on time. The IRS isn't well know for accepting excuses, either.

If you've had the pleasure of paying one of the IRS's penalties, you may find comfort in knowing you're not alone. ADP claims that one out of every three small businesses pays a tax penalty each year. You can minimize your expenses (and penalties) by using an outside service to process your payroll.

How Outsourced Payroll Services Work

A number of businesses specialize in processing payroll and can help you avoid costly payroll penalties and free you of many other payroll duties. A business that specializes in payroll processing will generally offer the following services:

  • computing and preparing payroll checks for your employees
  • preparing federal and state payroll tax deposits and seeing that you make them on time
  • preparing federal and state payroll reporting forms, including Forms W-2

In addition to the above items, some payroll processing businesses will even pay any IRS penalties attributable to errors they make in processing your payroll, or in payroll reporting for your business.

And in addition to avoiding the cost of payroll penalties, try to quantify these other costs and use them when making your decision to use an outside payroll processing service:

  • How much time do you spend preparing your payroll? Include the time spent computing and writing payroll checks, filing payroll tax forms, and preparing W-2s?
  • Do you have an employee who is responsible for preparing payroll? Could this employee's time be dedicated to other more profitable tasks?
  • Would you feel safer knowing that someone who specializes in processing payroll and has expertise in the payroll area is taking care of it for you?

Filling Cash Flow Gaps

Cash outflows and inflows rarely, if ever, occur at the same time. More often than not, cash inflows lag behind your cash outflows, leaving your business short of money on occasion. Think of this money shortage as your cash flow gap. 

The cash flow gap represents an excessive outflow of cash that might not be covered by a cash inflow for weeks, months or even years. Any business, large or small, may experience a cash flow gap from time to time—it doesn't necessarily mean the business is in financial trouble. Preparing a cash flow budget is the best way of predicting the cash flow gaps for your business.

Some cash flow gaps are created intentionally. That is, a business will sometimes purposefully spend more cash to achieve some other financial results. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a business that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season.

Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans and trade credit are just a few of the external financing options available for your business.


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