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MONEY

There's Money to Wring Out of Old Contracts

Chances are you haven't reviewed all your company's contracts and agreements in a long while. Here is how to trim the fat and put some extra jingle on the bottom line.

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Many of the companies I have worked with had a lot of waste that they weren't even aware of. Time and turnover can create some confusion about what and you are paying. So getting a "Fiscal" may be the thing to do.

The Fiscal

Establish a time line to gather information. It should include:

  1. All contracts and agreements: employment contracts, health insurance, payroll processing, accounting, marketing, printing, trash removal and basically all other vendor agreements.
  2. Insurance policies for the business: interruption, general liability, property, auto, D&O, EPL and any others you may have. For this stack use a business insurance broker. They work for you and can shop your policies to various carriers to see if you are in good shape.

Whether electronic or hard copy, save a copy of all of it. You would be amazed at how many times I have worked with a company that had in place agreements or contracts that they were unaware of.

Next, cull through everything and determine which agreements or contracts are current and do not need to be reviewed. When in doubt, leave it in the stack to review.

Finally review all of the other agreements one by one. You might find that in some cases that you are paying two different companies to do the same job. I have seen this. If there are no duplications look at your costs. If you have no idea what the value of the service is, put those in a stack for further review. If you know the value of the service and feel you are paying too much, put those in a stack for cancellation or renegotiation. Look closely to insure your agreement or contract doesn't list services that you are paying for but not using. IT contracts and telephone contracts are pretty big culprits here. (No offense guys).

Finally, take the stack that held the agreements where you were unsure of and solicit bids.  Reviewing the bids will help you to ascertain the value and see where your current vendor stands.

I am willing to bet that many if not most of you will find that there is some fat to trim. Here is a little tool to help you figure out the power of this exercise. It's a formula that tells you how much business you have to do to pay for a dollar of service.

Revenue – Cost of Goods – Expenses (include payroll) = Net operating income

So let's say that your revenue was $1,000, your cost of goods $200 and your operating expense $600. Your net operating income was $200 using the formula above. I'm no wizard but that comes to 20%. So for every $1 of services you have to make $5 to pay for it. Each industry will be different, for instance, retail grocery operates on a 1% to 2% bottom line, so for them with every $1 they spend they have to make $100 to $200 to pay for it.

So for those interested in putting money straight to the bottom line, let's get Fiscal!

Last updated: Apr 13, 2012

GLEN BLICKENSTAFF is the CEO of The Iron Door company, which makes high-end doors and windows. Glen has a track record of turning around and managing retail, building and financial companies.
@glenblickenstaf




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