Blog Archives - Stu Fleischer: The Common Cents CFO
 
A company's financial profit/losses are measured on a "hard" dollar basis (i.e., based on dollars received less dollars expended).  "Soft" dollars are services or products that cost nothing or relatively little but are perceived by the other party as having a high value.  Often, a creative financial manager can reduce the outflow of cash by offering to substitute "soft" dollars for all or part of a cash liability.

While CFO of a promotional marketing company, I used my sense of hearing to save my company over one-third of the monthly house-keeping costs.  Upon returning from lunch, I overheard a conversation between the building's landlord and a supplier, who was expressing his desire to secure some housekeeping service contracts from the building tenants.  Later that afternoon, I contacted the landlord who arranged for me to meet with the housekeeping company.  The new housekeeping company agreed to provide the usual daily housekeeping services at $6,000 per month for three years, including materials and bathroom supplies versus the normal going rate of $9,000 excluding materials and supplies.  In exchange for these substantial savings (with the costs of the materials, a three year savings of about $125,000), I promised to assist the housekeeping company in obtaining additional contracts by serving as a reference.   Subsequently, the housekeeping firm contracted with three other tenants in the building.

Another interesting illustration of a soft dollars/hard dollars swap occurred while I was the Treasurer of a large privately owned indoor/outdoor tennis club.   A severe winter storm caused major damage to a pressurized bubble covering four tennis courts.  The courts were unusable for three weeks.  The courts are rented on a seasonal basis and over $30,000 was owed to the contracted players due to lost court time.  Even though the loss of revenue was reimbursed by the Club’s insurance carrier, I explored alternatives to merely returning such monies to the affected players.  The players were offered 1 1/2 hours of tennis time at off hours or open hours at the end of the contracted indoor season for each hour of lost time in lieu of a refund.  Virtually all members accepted this plan.  The Club saved the insurance proceeds and only had to pay for the additional utilities (electric and heat) that were necessary to operate the courts for the extended period of time.

A third example has been effectively used by a leading mail order company for many years. Whenever a customer returns an order from a prior purchase, he or she is given a refund check.  In order to induce this customer not to cash the check, the mail order company offers the customer a 10% discount on future purchases that are paid fully or partially with the uncashed refund check.  Amazingly, this incentive has resulted in less than 10% of the refund checks being cashed.  In addition, the vast majority of the replacement orders exceeded the original credits (i.e. an added revenue source).

From these three situations, you can see how other parties can be enticed to accept items that cost far less but have a high intrinsic value for a hard dollar savings to the business that makes the offer.  This area of savings is vast and is limited only by the financial manager's imaginative and creative skills. 

 
Too many times, managers reorder products or renew service agreements without spending time to evaluate whether the supplier is charging a competitive rate.  The excuse offered is always something like "Why rock the boat? I have always been satisfied with the vendor's product or service."

Maintaining continuity of product or service is admirable and usually an attainable goal.  However, a conscientious manager keeps the vendor "on his toes." Often vendors will charge their best customers list prices because the user never balks and is unaware that others are paying less for the same product or service.

Periodically, the astute manager will solicit bids from competing vendors and will ask current vendors to meet any lower quotes.  It is not uncommon for the current vendor to reduce the price to meet a legitimate quote and keep a valued client.

For example, in my early years as a CFO of a promotional marketing company, the Company's air conditioning maintenance contract was up for renewal.  The landlord's suggested vendor offered to continue his services at $3,000 per year.  By making a few telephone calls, three bids in the $1,800 per year range were received.  Almost immediately after being informed of the discrepancy, the current air-conditioning company not only met the other offers but agreed to guarantee that rate for at least the next three years.

When the incumbent supplier will not meet the lower prices, do not be afraid to switch vendors. Besides reducing costs, you may be pleasantly surprised with the quality of the new supplier.

Especially in this economic environment, a financial manager must be prepared to spend a good deal of time soliciting competitive bids and negotiating in a tough but fair manner with all current suppliers.