Owner's Manual

If tight financial markets are cramping your company's style, it's probably time to take a hard look at cost control

Some entrepreneurs think that the challenges of starting and rapidly growing a company are simply so great that they can't afford the time to worry about matters like cost control. Other business owners complain that the demands of running a large, successful company leave them no time or energy to focus on how much they're spending.

But Art Allen, who built Allen Systems Group, an enterprise-software company in Naples, Fla., into a $50-million powerhouse in just 13 years, begs to differ. "If you're trying to grow a business and you either don't have access to capital or, like me, don't want to give away any equity in your company, then you need to be focused from day one on how to reduce or hold down costs." For small growing companies, cost control is especially essential in times like these, when tight financing markets (for all but a shortlist of Internet-related and other high-tech companies) require many businesses to rely on cash flow to fund their growth.

In our search for penny-pinching pointers, we contacted a range of chief executive officers, chief financial officers, and financial experts. Our conclusion? Plenty of old standbys still work well, including relying on stock options to try to keep a lid on salary costs, comparison shopping for the lowest-cost insurance plans, and taking advantage of early-payment discounts from suppliers. But thanks to changing marketplace conditions, there are also some new and different cost-control strategies that are simply too effective to overlook.

1. Use the Internet. Granted, it's tough to find a business (or individual) consumer whose shopping patterns haven't been changed by that giant mall out in cyberspace. But Stephen King, the president and CEO of Virtual Growth, a New York City-based accounting firm, recommends a new twist on the Internet theme: use listservs--E-mail lists you can subscribe to that are focused on a specific topic or enthusiasm--to network with other businesspeople who may be able to pass along useful suggestions. By going on-line, you can find out about the best deals while saving yourself time and money.

"The technique is incredibly effective, and it costs a business owner absolutely nothing," King says. "One of my clients needed to set up a merchant-banking account, so I sent out a message describing the company's needs on a Tuesday night. By Wednesday morning, I had 12 great leads." King's favorite listserv for entrepreneurial companies is the business listserv at http://wwwac.org.

2. Take advantage of group-purchasing discounts. Allen looks to his major suppliers, like Xerox, to help his company qualify for discounts on other items, such as shipping costs. But business owners whose orders aren't big enough yet to win that kind of benefit should look for discounts elsewhere, through industry groups.

Young companies that rely heavily on credit cards are finding that card issuers may offer many good purchasing discounts. Marcello Serrato, owner of Prestige Auto Specialists, in Boca Raton, Fla., a 14-year-old company with sales under $1 million, says: "My time is very precious because every minute that I spend on my company can be turned into money. But I don't have the time to spend comparison shopping whenever we need to make a major purchase." Instead, he calls American Express, whose credit card he and the company have used for nearly a decade. "I just upgraded our computer system and bought IBM machines, since AmEx gave me a 10% discount as well as its extra warranty. I also use Federal Express, since our credit card qualifies us for a discount there."

3. Find ways to audit significant operating expenses. Donna McGovern, the owner of Ideal Business Solutions, in Westminster, Calif., which provides part-time CFO and controller services to small businesses, advises her clients to try to cut costs on every single line item. "I tell them that just finding ways to make one or two reductions probably won't add up to enough to make a difference to their company's bottom line," she says.

Here's where a new breed of entrepreneur can help. "If a company spends a fair amount on its shipping costs, I'll recommend that its owner bring in a specialist to audit its freight bill," McGovern says. "Those kinds of companies will both look for errors in your prior bills and make suggestions about new ways that you can cut shipping costs." Among the most popular line-item auditors are telecommunications auditors, utility auditors, and accounts-payable auditors. A big selling point is that most auditing firms charge only contingency fees, so it won't cost your company anything if they don't find ways to save you money.

4. Keep hiring costs low. Scott Daniels, the CFO of Ad One, a New York City-based company that specializes in Internet classified advertisements, knows that fast-growing young companies like his can scarcely afford the $15,000 or $20,000 hit they take each time they hire an executive recruiter to find new staffers. "I look for any way I can to reduce that expense, because the way we've been growing, it can be overwhelming to contemplate fees for five or six new hires."

Two tips from Daniels: "If I'm making multiple hires and I absolutely must use a recruiter, I always try to negotiate a big discount. Or I try to cut a deal where I'll give the recruiter a small piece of equity if he or she helps with an important hire." Another approach: "If I can, I'll avoid recruiters entirely, by calling friends in the industry and asking them for leads to good people they weren't able to hire. That's how I found our new controller."

Stephen King tries to avoid hiring in areas that do not directly relate to the services he provides his clients. "I'm a firm believer in outsourcing," he says. "We even outsource our company's vice-president-of-marketing function to someone that we hire as an independent contractor for three days a week. And we outsource our human-resources function as well, which has also helped us qualify for low-cost insurance packages."

5. Sometimes, just say no. Art Allen's favorite cost-cutting technique is different from anything we've ever heard a CEO recommend. "Figure out what your fixed expenses are and what your variable expenses are. Then consider doing something very simple: one month, don't spend anything at all on your variable expenses. It's unbelievable how much that can help," he says. "There's not a company in this world that cannot learn how to manage by deferring its variable expenses for one single month."

Lest you tell yourself that strategy is only for large, well-established businesses, know that Allen has relied on it, on an occasional basis, since he bankrolled his company with only $2,000 in personal savings. "I can't think of an easier way to reduce your company's annual expenses, boost productivity, and improve its bottom line," he concludes.

6. Think holistically. If there's a single new trend in cost cutting, it may simply be this: setting cost-cutting targets is out; rethinking every single expenditure from the ground up is in.

"It used to be that companies would look at last year's budget and maybe say that everything will go up by 2% or 5%. Or if they felt they needed to cut costs, they'd say that everything will go down by 3%. But that just doesn't work anymore," says James Carulas, a vice-president at Meaden & Moore, a five-office accounting firm based in Cleveland. "These days there's always someone out there who has a lower overhead structure and can do what you do for less. So you've got to start thinking about the whole notion of controlling costs in a different and more comprehensive way."

What that means, quite simply, is that a company's owners and managers need to focus not only on what they're spending but on how and why as well. As an example, Carulas points to a law firm that might have traditionally spent a large sum each year maintaining its research library. "Maybe now all it needs is to invest in some CD-ROMs and learn how to make use of what's available through the Internet. That change alone could have a major impact on the law firm's operating budget. Not only does it not need to spend all that money buying law books, it also might need less office space and maybe even a smaller support staff."

While there's no single rule of thumb to help a company decide where--and where not--to make cuts, it's probably a good idea to explore all those areas that are not directly focused on your products or services. If you're strapped for time, as most entrepreneurs are, it pays to prioritize your efforts according to the size of their possible impact on your bottom line. Finding ways to cut the tab for your medical and business insurance, accounts-receivable and -payable operations, or human-resources operations might well result in a big payoff.

Jill Andresky Fraser is Inc.'s finance editor.


Cost-control basics
If you're trying to improve your company's cash flow, don't overlook these time-tested strategies:

Fine-tune your billing and collection procedures. Few fast-growing companies manage their accounts-receivable systems as effectively as they could, and that can be a costly error. You should be collecting outstanding receivables within 30 to 40 days.

Impose controls on your accounts-payable system, too. If you currently pay your own bills too quickly, you may be placing an unnecessary strain on the company's cash flow. Instead, schedule bill payments for their due dates (and not earlier, unless you can earn a significant discount by doing so). Pay fixed monthly bills electronically, if possible, to help time your last-minute payments.

Streamline your banking network. Comparison shop for new cash-management products and services. Thanks to the Internet, that should be quicker and easier than ever. Look for changes (or new products) that can help you cut your banking fees and improve cash flow in other ways.