Category: Savings - Stu Fleischer: The Common Cents CFO
 
Much of the art of negotiating is fairly standard and does not vary drastically.  Notwithstanding this generalization, certain contracts like real estate leases or insurance policies require the assistance of specialists.

Traditionally, real estate leases are long term (i.e., only negotiated every 10 to 15 years) but are usually a material monthly corporate expenditure.  Typically, a smaller enterprise has no internal expertise in negotiating such leases.  Therefore, before entering into a real estate lease, heavy reliance should be placed on the enterprise's attorney, broker, accountant, and interior decorator. While the base rent is the major component of the monthly payment at inception, escalations (e.g., real estate taxes, inflation based on a CPI index or the standard porter's wage rate) and other hidden costs can become a large percentage of the monthly payment in future years.  An expert's ability to slightly change a definition in the lease could save a company thousands of dollars over the lease term.

In addition, the expert might be very helpful in interpreting the lease's "gray" areas.  Generally, landlords will appease contesting tenants and/or their representatives in exchange for the tenants not publicizing the contested discrepancies to other tenants.

Negotiating insurance policies can be unusually technical.  Failure to employ an insurance expert knowledgeable in both your company and industry is not a good business practice.  The chief financial officer must utilize the insurance specialist to:

* Determine coverage needed;
* Determine policy limits and desired deductible amounts;
* Evaluate the financial soundness and claim settling record of the potential insurers; and
* Negotiate the annual premiums.

A perfect industry to emphasize the need for an insurance specialist is promotional marketing. Companies in this industry manage numerous sweepstakes, and contests which require errors and omissions insurance.  When I arrived as the CFO of a full service promotional marketing firm, it had paid $46,000 annually for $1,000,000 of errors and omission coverage with a $50,000 deductible.  I utilized an insurance professional more familiar with the risks and nuances of the promotional industry to negotiate a new $1,000,000 errors and omission policy with a $25,000 deductible at an annual cost of $12,500.  That was an immediate annual corporate savings of $33,500 or 73%.

Negotiating real estate leases and insurance policies are only two areas which require a high degree of expertise.  The company's financial professional should utilize specialists whenever he deems it necessary.  Do not be "penny wise and dollar foolish." 

 
Since interest rates are lower now than they have been historically, cash discounts have become more valuable.  As the following illustration highlights, it even makes sense to borrow funds to take advantage of a cash discount.

In this example, let us assume a company receives a $100,000 invoice with payment terms of "2 - 10, net 30" (i.e. the debtor has the option to take a 2% discount or $2,000 if payment is made within ten days of the invoice date or to pay the full invoice amount within thirty days).  Also, let us assume that the company has no current cash nor will it have the $100,000 until the final invoice due date but it does have a $100,000 bank line of credit with an annual interest rate of 6%.

If the company borrows the $98,000 from the bank on day 10 and repays the loan plus interest on day 30, it will cost $327 in interest.  Hence, the financial professional has saved $1,673.  Imagine how many thousands of dollars could be saved if this borrowing program were extrapolated to an entire year on all eligible purchases.

Even if a supplier does not offer cash discounts, there is reason to aggressively negotiate a discount.  With cash being tight these days, you can tempt a vendor into giving a cash discount by promising to pay immediately for a new purchase.  Should the supplier refuse the offer, it is neither illegal nor unethical to stress the fact that the vendor will absolutely never get paid until the due date.
 
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.