As we’re approaching the end of 2021, many businesses are finding some disappointing profit margins. With the volatility of 2020 and 2021, it’s likely that your profitability suffered.
While we can’t predict what will happen in 2022, one thing we can do is offer some tips for effective cost management strategies. Many businesses spend more on supplies and vendors than they actually need to, which causes extra spend and less profit.
Now is the perfect time to plan ahead for 2022 and reduce excess spend.
How to Improve Profitability in 2022
1. Conduct an Invoice Audit of Functionality Expenses
Taking the time now to review how much you’re actually spending can do wonders in the long-term. For dealerships, your DMS invoice is an excellent place to start. For other businesses, take a look at your current management system where you track functionality expenses like electricity, internet, software, etc.
To conduct an audit, follow these three steps:
- Compare your monthly invoice charges against the contract, note the discrepancies, total them up and notify your provider.
- Utilize a 3rd party to review your invoice and compare the prices you are paying against market price or “best in class” pricing. At this point you will need to go back to your provider and seek a renegotiation of your contract rates if that is possible.
- Look at what your team actually uses monthly vs. what you pay for.
Many businesses contract for functionality, pay it monthly and never use the printer, the software module, etc. and waste precious dollars each and every month. When this audit is completed, it is time to get back to your provider and terminate those services not utilized.
2. Audit and Renegotiate Telecom Expenses
When did you last negotiate rates on the “utilized” telecom fees for local, long distance and data? When is the last time you conducted an audit of the services provided, lines used, services received? Telecom is still an area where cost savings of 50% are possible.
It’s always worth it to compare your current service vs. new options – in many cases, switching to fiber can reduce expenses in the long-run. Further, large organizations without a central I.T. or Purchasing function typically end up paying for unused lines. Check the market for phone services by soliciting quotes and have your vendors assess your system to identify redundancies and unnecessary services.
3. Consolidate Marketing Suppliers
Your largest expenses other than labor will typically be found in Marketing and Advertising expenses. When we conduct our spend assessments, we usually find the largest amount of suppliers in this area, sometimes 2-3 suppliers for each marketing sub-category. The other observation is that typically businesses are paying more than one provider, but using only one providers’ functionality.
The best way to attack this category is to pull all marketing related invoices for the past 3 months, sit down with your sales and management team, identify suppliers that are providing measurable value, identify invoices with redundancies and eliminate those suppliers or that functionality. Your target here should be 10% or more of your marketing and advertising expenses.
4. Develop a Prioritized Sourcing Plan
Organizations on average spend between 4.5% to 8% of sales on supplies and services in general. This expenditure is spread across 80+ expense categories. Who is responsible for managing this expense at your company? Do you have a sourcing plan that targets 1-2 expense categories each month? Savings of 15-25% are possible by spending some time and attention in this critical expense area.
Profitability can sometimes be accidental in a business, but strong profitability is based on deliberate actions and an engaged management team, including the management of suppliers, pricing and contracts. Develop a sourcing plan, even if on the back of a napkin to get this process started – positive results will surely follow.
5. Audit Your Healthcare Billing
If your organization is self- insured for healthcare services, there can be some significant dollars that can be returned to the business through routine audits of provider over-charges. The greater the expense, the greater the potential.
6. Implement a Preferred Supplier Program
Most single point Dealerships have 400+ active suppliers in their system, providing services in roughly 80 – 130 expense categories. For other industries, these numbers can be quite similar. If you do the math, it is clear that there are more suppliers than are necessary in most cases.
Narrow down your supplier base by designating those that are your primary or “Preferred Supplier”. If you drive the majority of that category expense to those suppliers designated as Preferred, you will maximize your leverage in terms of potential benefit to you and the supplier will benefit as well. This program will allow you to realize additional services, terms and financial benefits from suppliers that were not previously available.
7. Earn a Cash Discount to Build Your Bottom Line
Your business is probably paying a number of supplier invoices by credit card and building up a large inventory of points for travel purposes. Businesses interested in building their bottom lines use credit card payments for cash discounts and increased float and do so successfully. More and more suppliers accept credit card payment for invoices and the provider options are improving all the time.
If your organization has built up enough points, it might be time to contact your bank to explore options. Most providers will provide a discount ranging from 1.25% to 1.5% for payment by credit card.
If your profitability is not meeting your expectations or your plan, now is the time to reassess your strategy. The active management of your spend or your expense categories can make an immediate and sustainable contribution to your profitability.
If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone. Strategic Source’s Profit Improvement program help you identify areas for improvement long-term.
Strategic Source offers procurement solutions, business spend management, and tactical sourcing to help businesses reduce costs. We understand the difficulties of choosing suppliers and managing vendors. Whether your business needs self-service digital solutions or complete spend management, Strategic Source can help. We deploy a wealth of experience and support for less than the cost of maintaining a purchasing organization.