When I went into business for myself in 1995, it was important to track my long-distance phone calls. Some clients would pay long- distance phone expenses in addition to their fees. For an extra charge, I had my phone company isolate those calls using account codes that I punched in after dialing. That way, I could itemize calls for each project and bill them to clients.
Much has changed since then. Long-distance calls are cheaper and, thanks to e-mail, I make fewer of them. Most of my clients now pay higher base fees that adequately cover expenses. Yet, until early this year, I paid $5 a month — $60 a year — just to isolate long- distance calls. Some months, that $5 was more than my whole long-distance bill! The money I was paying out each month wasn’t worth the very small expense I was trying to recapture. I bit the bullet and dropped the account-code feature.
Take a look at your business. Are you absorbing hidden costs by trying to save money in some way that looked smart at the time but ends up cutting into your bottom line? Are you paying more now for doing something that once saved you money? What are you doing that’s penny-wise and pound-foolish?
See the big picture
At least once a year it’s worth looking at the bigger picture of your business, and those are among the questions you should ask yourself. Let’s get specific:
Do you skimp on maintenance? Think of your buddy who drove his last car into the ground because he was too cheap to change the oil regularly. Or the time you put off that brake job because you just weren’t sure it was necessary and money was a little tight.
Skimping on maintenance may save you money in the short term, but it can cause havoc down the road. If you’re a success in your business, you probably encourage all your customers to regularly seek preventive maintenance for their systems. But how well do you follow your own advice?
Do you skip equipment features or options that you really need, just to save a few bucks? I’m told that contractors who run vacuum trucks often do things like leaving off a pressure relief valve or opting for a smaller, underpowered pump, just to cut costs. Choices like that can bite you back down the road, when you face an expensive repair that costs a lot more than the money you “saved.”
Do you obsess on saving money? Of course, you should always look at ways to optimize your costs. But be reasonable. Don’t spend an hour chasing three printers’ bids to save $50 on a new supply of letterhead, when you could be out selling jobs worth thousands of dollars.
Do you skimp on insurance? Admittedly, this is a trickier one. There is such a thing as being over-insured, and you want to make sure you’re not paying more than you need to. But just going for bare-bones coverage is flirting with disaster. Don’t do it.
Do you ignore certain regulations? The temptation is always there, and you may know competitors who try to shave costs by pretending they’re above the law. Remember this: fines — or worse, penalties — are a whole lot more than simply a “cost of doing business.” They can set you back or wipe you out.
What about people?
Do you cut corners on human resources? This covers a lot of possibilities. If you underpay your employees, they’ll probably get unhappy and, in time, depart. Pay what they’re really worth. Businesses that last are those that live up to the axiom that employees really are the greatest asset a business has.
Don’t hire on the cheap, either. Invest in time and money to recruit people carefully. Ask for references, and check them. You might even consider criminal background checks, especially if your employees work in people’s homes.
Know when to pay overtime, and when to hire more people. Both hiring and not hiring can be penny wise, pound foolish, depending on the specific situation. If you’re just experiencing a seasonal surge in business, trying to save on overtime by hiring more people can be more expensive when the extra workers are still there after crunch time ends. But endless overtime pay when you really need to add staff can cost you a lot more than time-and-a-half if your team gets burned out, or your customers feel neglected.
Do you maintain a separate business bank account? That’s a no-brainer, right? Except that some people earning six-figure incomes as sole proprietors don’t stop to set up an account just for the business. The fees for a second account are nowhere near as high as what the IRS can penalize you if you can’t justify the business expenses you reported on your tax return.
Do you mismanage debt? I’ve written before how you can take advantage of zero-interest credit-card purchases and balance transfers to get short-term debt. That can be useful, but be careful. “Free” interest can get awfully expensive if you miss a payment or don’t pay back the debt by the end of the time limit.
Do you skip professional advice? Sure, lawyers and accountants cost money, but there’s a reason to seek their counsel. You know how expensive it would be for your customers to try doing their own drain cleaning. Now turn that around and stop trying to be your own CPA or attorney.
Do you low-ball your customers? So many times we think we can get more business by charging cut-rate prices. If you don’t know by now, believe it: There will always be someone cheaper.
Most foolish of all
Charging less than you need — to operate your business, to hire good workers and sound outside expertise, to pay for the proper equipment, to operate comfortably on the right side of the law, and to earn a reasonable profit — may seem wise when the price-shopping customers call. But it’s about the most pound foolish approach you can imagine.
