NFIB

Don't Let "Spending Control" Spin Out of Control as Your Company Grows
03/ 05/ 2002


As your company grows, one of the primary ways to keep costs under control is to coordinate all purchasing activities. In today's Workshop, Jeffrey Moses shares a few tips on how this coordination can be effectively implemented and maintained.

Coordination of spending may seem straightforward, especially when all or most of it is done by the company's owner. But such purchasing should not be random. Even a relatively small company can benefit by establishing a "purchasing committee," or "purchasing team," which would meet regularly to discuss and determine all important product and service spending. The simple act of meeting in committee focuses greater attention on coordinating spending -- and can save a small company thousands of dollars a year.

Once such a committee or team is formed, a master list of spending categories should be drawn up. Priorities need to be set, with an overall budget divided among the specific categories. Spending categories could include:

1) Direct expenses related to the company's core business, including raw materials and supplies.

2) Professional services (legal, consulting, public relations and marketing, outside accounting, professional training, janitorial, etc.)

3) Office expenses (office supplies, copying, furniture, decorations, etc.)

4) Travel expenses (airfare, hotels, car rental, food, etc.)

5) Utilities (electric, water, gas, etc.)

6) Information systems (hardware, software, Internet, phone, courier, mail)

7) Employee benefits (insurance, retirement plan expenses, etc.)

One of the central goals of spending control should be the definition of cost limits for all targeted products and services. For example, a growing business may contract with an outside consultant to suggest and supply computer equipment (hardware, software, Internet services, etc). If the relationship with this consultant is not defined properly from the beginning in terms of objectives, timing, responsibilities and performance, the total cost could expand to many times the initial projections.

Many larger businesses purchase with credit cards. While this offers flexibility, speed and excellent record-keeping, it may prove risky to a smaller business, which may be prone to cash-flow ups and downs. Smaller businesses can benefit from including the company accountant or business adviser(s) on the purchasing team so that all purchasing decisions can be better integrated with projected cash flows. Teams should always set prudent projections for future company income so that expenditures can be realistic.

As a company grows, the responsibility for indirect spending usually tends to move farther and farther from owners, who may prefer to be involved in more "important" activities. Few things, however, affect the long-term growth and profitability of a company more than does the sum total of indirect spending. Top management should maintain involvement in the process, helping to guide and budget expenditure. Such activity may not be "flashy" or "managerial" -- but every dollar that is directly or indirectly saved in purchasing falls all the way to the bottom line.

Purchasing is a field that has been much studied in larger businesses. Numerous fine books are available on the subject, with quite a bit of the material applying to smaller businesses. The following are only a few:

1) The Purchasing Handbook by Harold E. Fearon(Editor), Donald W. Dobler, Kenneth H. Killen (Editor)List Price: $84.95 907 pages 5th edition (October1992) McGraw Hill

2) Value-Focused Supply Management: Getting the Most Out of the Supply Function by Alan R. Raedels List Price: $45.00 Hardcover - 174 pages (December 1994)Irwin Professional Pub

3) Managing Purchasing: Making the Supply Team Work(Napm Professional Development, Vol 2) by Kenneth H.Killen, John W. Kamauff (Contributor), John W. Kamuaff List Price: $45.00 Hardcover - 268 pages (March 1995)Irwin Professional Pub

4) The Services Buyer in the Role of Project and Cost Management by Brian Farrington (Contributor), Derek W.F. Waters $57.95 Hardcover - 400 pages (January 1998) Intl Thomson

Some information in this article originated in the article "Taking control of 'indirect' corporate spending." Purchasing magazine, September 2, 1999.

workshop.accounting.tue
11.2.99

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