NFIB

The Secret Life of a Tightwad
04/ 01/ 2004

by Shannon Scully

Striding through his Atlanta office on his way home at night, Sean Murphy does a quick check to see if employees have shut down their computers. Like the age-old reminder from fathers everywhere to never leave a room without turning out the lights, Murphy recently convinced his staff how much money could be saved by not powering their PCs overnight.

As founding partner of 250-employee Canvas Systems, which sells refurbished high-end computers, you'd think Murphy had more important things to worry about. But focusing on details like unused electricity is exactly what makes this closet tightwad a highly successful businessman.

"Lots of people think it's penny pinching, but I think it's smart business," says the 37-year old Murphy, who started the computer shut-down policy after he noticed the electricity bill was increasing each month. "Power to computers when no one is here creates zero return on investment."

Saving money ranks up there with exercising more often. Our intentions are good, but our time is limited. Every small-business owner means to sit down with the financials and find areas to squeeze. But meetings get scheduled, inboxes get full and all of the sudden we're halfway through the year.

Fortunately, this year looks a lot better than recent ones. NFIB's monthly Index of Small Business Optimism readings have hit near-record-high levels during recent months. Now small-business owners suddenly find themselves in a position where saving money -- instead of praying to meet payroll -- is actually an option.

But do you have to hire a full-time accountant to create a long-term financial strategy for your business? Do you have to ration pens and pencils, staples and paperclips among employees? No. But you do have to adopt a few habits shared by all the self-proclaimed penny pinchers in this story. You have to relearn the basic principles laid out in every book ever written on how to become a millionaire. You have to be fiscally prepared for the next time the economy falters. And you have to start today.

Be Vigilant About Saving

There are no rubber stamps at Canvas Systems (www.canvassystems.com). Murphy knows how much his business owes the power company each month, and he expects employees to be just as vigilant with the dollars under their watch. If a vendor promises a certain rate, employees eyeball the invoice to make sure they're getting the price offered in a sales pitch.

Small-business owners are so busy running their businesses, they often don't get the chance to check an invoice after the fact, says Murphy.

"Anyone who signs off on invoices doesn't need to just rubber stamp it, they need to review it," he says. "We've found a lot of situations where we signed a contract based on a promised level of discounts, but the invoice came out very different -- to the tune of thousands of dollars."

No one cares about your bottom line as much as you do. That's why Murphy doesn't wait for vendors to offer discounts, he asks for them. "Small businesses don't ask for discounts when they should," he says. "Get vendors to tell you what kind of volume is needed for a better price."

The universal rule when shopping for services is to get three quotes. But Canvas Systems' employees go a step further.

"Three quotes sometimes give a false sense of security," says Murphy, who has grown Canvas Systems from four to 250 employees in five years without outside financing.

Instead of three prices, managers are encouraged to come up with creative solutions: Should we buy new, buy used or can we rent? That sort of thinking is tied to the very core of the business, since Canvas Systems convinces its own customers to think outside the box and buy used IT equipment. "We have to be able to eat our own cooking," says Murphy.

With Coca-Cola's global headquarters just a few miles down the interstate from Canvas Systems, the choice seemed obvious when Murphy's business was looking for drink machines to put in the employee cafeteria.

"Of course we called them first," says Murphy. "But then we looked around and came up with the idea to buy used Coke machines, stock them with drinks ourselves and only charge enough to cover our hard costs."

Canvas employees now pay 30 cents to drink the same soft drinks that would have cost them 75 cents had Murphy gone with the easiest choice.

Chris Zane of Zane's Cycles doesn't always take the easiest path at his Brandford, Conn., cycle shop either. His motto: When it comes to commodity products, question your costs continuously. He gives up extra time in his schedule to negotiate the best prices on everything from toner cartridges to copy paper. Confident in his employee's ability to sell bikes, Zane considers his penny-pinching efforts a good investment in his business.

Recently, a credit-card processing company approached him with a better offer than the bank he'd been using for seven years. "I called up the bank that handles our account, told them about my better offer and guess what, they met the price," says Zane, who has never had to switch vendors over price. "They're like me. They understand the value of a lifetime customer. It costs them more to get a new customer than it does to keep me."

Understanding the value of superior customer service is what helps Zane's Cycles (www.zanescycles.com) compete with the Wal-Mart that recently opened. In the 23 years since he purchased the existing bike shop, Zane has grown it from $56,000 to $5.5 million in annual revenue. But he didn't get that far by spending money frivolously. Understanding the bottom line and constantly tweaking finances keeps the wheels of his business spinning.

Zane's employees shuffle inventory between a warehouse and his retail store several times a week. For a while, it seemed like buying a truck to haul the bikes was the smartest decision. But after further review, Zane discovered renting a truck from a nearby dealer was a lot less expensive than covering the cost of a vehicle, its insurance and upkeep.

"I'm passionate about cycling, but I'm more passionate about the business," says Zane. "I love the fact that I have 40 people working for me, and they all have health insurance. My responsibility is making sure the bills get paid and the payroll checks don't bounce, and that means being thrifty."

Forget About Status

Marina Hatsopoulos sells complex, three-dimensional printers that start at $29,000. Customers of her Burlington, Mass.-based small business include companies like Chrysler, Kodak, BMW and Motorola. Who would ever guess that Hatsopoulos manages all these high-powered deals with some of the world's largest companies from her 7 x 8 cubicle in a less-than-glamorous office park?

"I think space says a lot about a business, in terms of what your priorities are," says Hatsopoulos, who founded Z Corporation (www.zcorp.com) with two partners in 1994. "No one here has a private office. Senior managers get no perks. We're all in cubes, and we're very crowded."

Z Corp. can afford plain digs because they travel to their customers for meetings. For the few times that clients visit the Massachusetts office, they're hosted in an area not crammed with people or machinery. "We have certain sections of the building that are for public consumption, and we're very careful about those. You don't want to look unprofessional."

Being frugal is easier when a business is new or slow. But it's when a company is flush with cash that an entrepreneur is tested.

Hatsopoulos recalls a few years ago when Z Corp. was growing rapidly and hiring a lot of employees. For a short time, the company lost the frugal edge that had fueled its growth during the early years. Luckily, she says, the founders saw the slide and were able to stop it and return the company and its 94 employees to its penny-pinching roots. "Now we are as frugal as ever," says Hatsopoulos. "But it's a lot easier to establish and retain that culture than it is to find it later."

Running a lean business requires you to drop out of the status game. But it's not easy. The keeping-up-with-the-Joneses syndrome affects small-business owners, too. You work long hours and take lots of risks -- why shouldn't you occasionally indulge yourself?

Alan and Lisa Lee Morgan recently faced the same question at their general contracting firm, Lee Morgan Inc., in Charlotte, N.C. (www.leemorganinc.com). Alan needed a new truck for work. He had driven a Ford Expedition for five years, but decided to test drive some more expensive SUVs since he was looking.

"He looked at a Mercedes and Lexus SUV but ended up getting another plain blue Ford," says Lisa Lee, an architect who started the business with her husband five years ago. "We decided it's not worth it."

Before every major purchase, the Morgans ask themselves: Will this help us or our employees do a better job, or is it just for show?

"If it's just about how something looks, we don't buy it," she says. "There are a lot of people who think status is important. But those people probably aren't going to hire us anyway. And I don't want them to."

Clean trucks and orderly work sites are trademarks of Lee Morgan; extravagance is not. "It's important that clients see us as frugal," says Lisa Lee. "It's the image we want to project, because it's the kind of company I'd want to buy from."

Reward Employees

So maybe you're now on board the with idea of being frugal. But what about your staff? Every employee doesn't need to work in a place with gurgling fountains in the lobby or skyline views from every office. You'd probably never hire someone who demanded his company car be a luxury SUV.

But how does Z Corp.'s Hatsopoulos retain top employees when even she herself admits the working environment is less than desirable? "We'd rather give money to employees than pay for big, fancy offices. It's not worth it," she says.

All of the small-business owners interviewed for this story shared one surprising trait: They all claimed to compensate employees very well. You must reward employees financially, these small-business owners say, in order to encourage them to be good stewards of your business' resources.

Chris Zane relies on every person in his company to watch the way money is spent. "You can't have one person be responsible for cutting costs across the board," says Zane. "It comes down to a culture within an organization."

He says he is confident employees care about profitability as much as he does, because they recognize that they get back all the money saved.

"It's not like the savings sit in my pocket," says Zane. "We take trips to the amusement park, have lunch brought into the stores and give out big Christmas bonuses."

Canvas Systems' Sean Murphy says his challenge is encouraging employees to save money without being so tight that he kills morale.

"Our message to employees is that the only thing we're extravagant about is our people," says Murphy. "We're not tight with our money. We're just tight with our money to outsiders. We lavish it on people inside these walls."

For the past three years, Canvas Systems has given away thousands of dollars to employees for meeting annual goals. One afternoon this past January, Murphy handed out $30,000 in cash to employees as a thank-you for a successful 2003.

"It's a challenge for small-business owners to stay generous," says Murphy. "But we want to reward people for not wasting money on little things like letterhead and pencils. We want to be clear that all the savings aren't going back into the owners' pockets."

In a culture where every dime is checked twice before it's spent, you have to prove to employees why their efforts are worth it, says Murphy.

"Our employees have learned to despise waste as much as we do," says Murphy. "These people work harder for us than they should. It's a secret we've found, and the formula works for us."

Pinch and Stretch Smart Tips for Saving Money

Every small business has different expenses, so there are few blanket rules about how to save. The one similarity is that every entrepreneur needs to manage money wisely. In his new book How to Make Big Money in Your Own Small Business (Hyperion, May 2004), author Jeffrey Fox offers these and other ideas on making your business successful:

Pay Steak and Eat Hot Dogs -- Good employees are worth their weight in gold. Just like the small-business owners in this story suggest, pay competitive salaries to people who can help you grow your bottom line -- even if it means skimping on your take-home pay. Let valuable employees eat steak while you snack on hot dogs. You'll all eat caviar in the end.

Pick Up Paperclips, but Overspend on Customers -- Turn down the heat, turn off the lights, take the subway, reuse paperclips. Do everything you can to save -- except skimp on customer service.

Hire a Penny Saver -- Different from a penny pincher, a penny saver is the master at getting exactly the same services for a fraction of the cost. If spreadsheets make you cross-eyed, hire someone who loves them. Every small business must have a financial steward.

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This article originally appeared in the April/May 2004 issue of MyBusiness magazine.

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