Get a Hold on “Holding” Expenses
Have you ever calculated how much it actually costs your company—whether it’s a buyer or a seller—to hold supplies?
You might be surprised to discover how expensive holding really is. There are the costs of storage facilities and transportation and handling equipment. Add to that breakage, theft and spoilage. As if they weren’t enough, calculate the lost opportunity value of idle inventory that sits in a warehouse.
You may be surprised to find that your total holding costs exceed 15% of the basic price of the supplies.
So what can you do about it?
To begin with, carefully calculate your true holding costs. Don’t rely on estimates. Get the actual numbers. Then, when you negotiate an order—whether you’re a supplier or a customer—let that information guide you. Try to break the price negotiations into their three fundamental parts:
The basic price of the supplies.
Discounts linked to order size.
Discounts (or additional fees) based on shipment timing.
Tip: Resist negotiating all three issues as one unit; insist on dealing with each separately. After all, each has its special elements, and if you deal with them together you’re likely to overlook key factors that will affect the final cost.
The timing of the shipments will be the most complicated issue. For example, assuming you’re the customer, you can place an order for 1,200 units, but instead of having the shipment sent as one order to your warehouse, you may want 100 units delivered at monthly intervals and maybe not even to your warehouse but directly to the various facilities that use them.
Is an LLC in Your Future?
Add this to your to-do list:
Call my lawyer and ask whether we should be thinking about converting to a limited liability company (LLC).
As you probably know, an LLC corporate structure combines the best traits of a corporation and a partnership. Many thousands of businesses—large and small, new and well established, subsidiaries and joint ventures—have made the legal switch.
A limited liability company is generally treated as a corporation, but for tax purposes it’s a partnership. It has the tax advantages of a partnership and the legal protection of a corporation without the disadvantages of an S corporation and a limited partnership.
It’s a complex issue, but it’s well worth the investment of time to see if your organization can profit from such a move.
Power of Positive Thinking
Don’t think cut costs; think boost profits.
Aren’t those ideas just different sides of the same coin?
Not really. If your mindset is cutting costs, you’ve subtly but effectively bypassed the opportunity to search for innovative ways to improve profits. It may turn out that boosting profits can best be done by cutting costs. to find out, though, you must first examine both possibilities and then compare one against the other.