Excerpted from the book on conscious business management, Business Black Belt
Play for more than you can afford to lose,
and you will learn the game.
~ Sir Winston Churchill, English statesman
Sometimes an obvious no-brainer good deal falls apart when you add up its components.
I recently received a very clever phone pitch. A tele-salesperson called to congratulate me for being such a good magazine customer. She offered me 5 magazines free of charge for 60 months. I thought this was outrageously good. She explained that the magazines wanted to increase their circulation for their advertisers. I had been subscribing to a number of magazines so I deserved to get this offer. I was going to receive several different magazines to review and then I could receive them for 60 months.
I thought about it for a moment — and did the math… 60 months is 5 years. That’s a long time to be receiving a free magazine. My first alert.
Then she told me, “All you have to do is… please help us out with a service charge of only $2.99 per week.” At first, I thought $2.99 a week isn’t too bad. Then I thought, “Wait a minute!” Multiply $3 a week by 52 weeks. That’s $156 a year. $156 per year divided by five magazines equals $31.20 each! Yikes! That’s a lot for just a “service charge.”
This special offer was a total rip-off, especially when you consider what it costs to subscribe to most magazines. Most magazines offer a year’s subscription for anywhere from $10 to $20. So just by doing the math and translating weekly, monthly, and annual amounts puts the whole thing into perspective. Five magazines should weigh in annually at about $70 tops!
Look at the line items
My company got a quote on our new packaging that included a reference book, several diskettes, labels, box, assembly, and so on. In large quantities, the overall price of $300,000 seemed in line. But when I looked at individual purchase orders for each component of our order and thought about how much each book should cost at a quantity of 32,000 units, the price per book seemed too high.
If I subtracted even 15% and took 35 cents off a $2.35 book, the cost came down to $2.00 each—which is what I asked our materials manager to negotiate. After going through most of our order, I demanded better pricing on many items. Overall, we saved over $35,000 on that one purchase. That’s $35,000. Just adding up the numbers and considering the financial impact of each of the components of every deal can make a huge difference. It took less than 15 minutes.
Get into the habit of doing the math. When you get a bill from a restaurant, especially if it’s done by hand and not by computer, recalculate it. I’ll bet that two times out of ten, it’s wrong. There may be extra charges for things you didn’t order or didn’t get. The totals could be wrong, sometimes significantly wrong. (By the way, some waitpersons add the gratuity but still don’t total the bill in the likely event that you’ll add an additional tip as a knee-jerk action in the rush to get out of there.)
Once I was scanning my hotel bill line item by line item. I happened to see “2 movies” at the bottom of the bill. I said, “Wait a minute! There is a $7 charge in that bill that isn’t mine. I only watched one movie.” Without hesitation, I pointed it out to the clerk who immediately removed the charge. The minute that took would be worth about $420 and hour.
Cheapskate or not, practice and develop the habit
Although you may seem tight, the habit of checking needs to be developed. If you’re willing to accept a $7 error on a $700 bill, I’ll bet you’d give up $5,000 on a $50,000 print order. It’s significant and it all adds up.
You’ve got to develop this discipline across the board to catch those things. Over the years, you could easily overspend $30,000 – $50,000 on mathematical errors alone. It’s frightening to consider how much money you can waste without even realizing it.
Now look at how you buy
Let’s go beyond how much things cost to how you acquire them. Many people go out, buy something, then go to their accountant to see if and how they can get a tax deduction on it.
If there’s something expensive you want to buy—a house, boat, plane, or equipment—I recommend that you talk to your accountant ahead of time and ask, “What’s the best way to acquire or pay for this item?”
Some time ago, I bought an airplane, a 1980 Beechcraft V35B. I could have rented airplanes from my flying club for much less than I could buy one. But I went to my accountant and asked, “What’s the cheapest way for me to acquire this plane and deduct it from my taxes? I could do it through my business, but what are the ground rules? How can I justify it?” I didn’t want to go out and buy the plane first and then ask my accountant, “How can I write this off?”
If your tax bracket is between 30 and 40%, making sure that you follow the IRS rules means your savings could be significant, perhaps enough to actually afford an airplane.
Save and wait, or buy now and make payments?
I was brought up with the idea that I should save my money until I had enough to buy something I really wanted. I find that I am unable to save. I don’t have enough discipline or patience to religiously save up for something I want. I end up spending it on smaller things and never get to the bigger things. Having a financial institution I owe money to is very serious so I know I must make the payments. In fact, to me it’s more motivating to make my payments every month than it is to save. I’ve discovered that this self-induced stress of creating the situation where I must make payments is a greater incentive for me. I keep going because I have to, otherwise I might become complacent and stop growing. Upping the ante also keeps me out of “scarcity” thinking. When I really want something or it makes good business sense, I go out and buy it now on credit knowing that I can handle the monthly cashflow to pay off the debt.
Interest is the premium you pay for immediate gratification
Is what you want worth having now, enough to pay the debt? If I use a credit card with 15% interest, I look at the price of something, tack on 15%, and I see if that is worth it to me. If I could buy something at half price by getting it now, adding only 15% might be worth it.
Don’t necessarily shy away from paying interest on something. In a way, I am for putting things on credit cards. If the value of the thing will pay off more for you to have the item, service, or the seminar right now, charge it. If the return on investment is greater than the price plus the credit card charges, it can still be a good deal.
The economics of shopping around
When I first started my brochure and sales promotional business, Tools For Sales, I knew I needed a computer. I also knew, being in the computer business, that I could probably get a good deal. I shopped at all the stores for the best prices, but still I thought I could get a better deal if I waited a little longer or found a friend in the business who could get me a discount. In the meantime, I borrowed a Macintosh from friends at Apple Computer and drove several miles into town to print documents at a cost of $.50 per page. (Laser printers sold for $4,500 in those days.) This went on for about a year! Finally, I got a deal on a new Mac with a laser printer and some software. It was amazing how much more productive I was by having all the right tools to work with.
It would have been far better for me to have used a credit card, paid full retail at the beginning of that year, and purchased everything I needed—old technology or not—enabling me to productively build my business.
You must adjust your focus to the bigger picture—go for the big money and sometimes overlook the small premium you might pay because you didn’t shop for the best deal. The fine line to be drawn here is the value of your time. This is important for you to absorb for two reasons:
• You, the busy businessperson, have more important things to do than spend your time shopping around for minimal savings.
• You, the person selling your product or service, must promote the value, convenience, and immediate benefit of buying and using your product or service today and prevent your customers or clients from wasting their time.
Although I suggested using your credit card to buy what you need, be careful. Too much debt too soon sinks many a beginner. I made my purchase decisions based on one criteria:
Does it generate immediate cash or not?
Could and would I use whatever I bought as a tool to make money? I was careful not to get sucked in to buying a quantity of something just because the per-unit price made it a bargain. Buying a quantity of something, although it would save money in the long term, would cost valuable cash that I needed for other important things. Do the math: immediate cash or long-term bargain?
Business Black Belt Notes
• Add up the numbers and study the financial breakdown of every deal.
• Translating costs into the weekly, monthly, and annual amounts can put the whole thing into perspective.
• Mathematical errors alone can cost you thousands of dollars over the years.
• It’s not so much how much things cost but how you acquire them.
• Interest is the premium you pay for immediate gratification.