The Dollar You Don’t Have to Sell

Many business leaders I talk to are circling the same question, in different words: how do I protect my margin?

The backdrop isn't subtle. Consumer prices are up 3.4% over the past year, and gasoline is up 27.4% (BLS). RSM's latest survey found 75% of middle-market firms paid higher prices in the third quarter, and it reads the data as companies covering the gap through a mix of margin compression and price increases (RSM). KPMG found that 55% of executives at companies with $1B or more in revenue plan another round of price increases of up to 15% (KPMG).

Two Reactions, Neither a Plan

Raise prices and you're asking your customers to carry it. Absorb the increase and you're spending margin you spent years building. Either can be the right call for a quarter. Neither one is a plan.

There's a third move, and almost nobody reaches for it first. It doesn't involve a customer, a salesperson, or a single new sale.

The Lever Nobody Is Watching

In Scaling Up, we talk about seven levers of cash: price, volume, cost of goods sold, overhead, and the three working-capital levers of receivables, inventory and payables. Nearly every one of them touches a customer or a supplier relationship. Overhead doesn't.

It's also the lever most companies leave on autopilot. Contracts get signed in a hurry, renew themselves, and end up owned by no one in particular. Each line looks too small to matter. Together they add up, across more than 30 categories: phone and data, payment processing, shipping, uniforms, utilities, insurance, benefits and more.

You can't control inflation, interest rates or your customers' budgets. You can control what you agree to pay for the things you already buy.

One Dollar, Four Decisions

I've written that strategy is the decision the other three depend on, and I haven't changed my mind. But a strategy needs funding, and that's where cost savings comes in. It lands in Cash first, but it doesn't have to stay there.

Strategy: it funds the growth move you couldn't afford. Media buying and business valuation are two of the categories that touch it.

People: it funds the hire you've been putting off. Benefits, workers' comp and staffing savings touch this one.

Execution: it replaces manual overhead so your team gets its focus back. Telecom and fuel and logging devices are two examples.

That's the part that gets lost when cost savings is treated as a finance exercise. It's a leadership decision.

The Exit Math

When Enjoy Life Foods went through diligence, every line of the business showed up in a data room. That's where cost savings stops being about this year's margin and starts being about enterprise value.

Run the numbers. Say you find $350,000 a year in recurring savings. In most recurring-spend categories there's no upfront cost: the company keeps half of the savings for the first three years and all of it after that. Over five years, that's $1,225,000.

Once those savings are fully retained, they flow straight to EBITDA. At a 5 to 10 times multiple, $350,000 a year becomes $1.75 million to $3.5 million of enterprise value. That's an illustration, not a forecast. Actual savings, fee arrangements and multiples vary by company, category and market.

What It Looks Like in Practice

Here are three results from engagements run through our partner network, with client names withheld.

A $10M manufacturer found more than $160,000 a year in shipping by consolidating its international volume with one vendor and streamlining customs.

A $60M healthcare company was paying for hundreds of wired and wireless lines it wasn't using. The savings: more than $750,000 a year.

A skeptical CFO at a $700M construction company tested one category, wireless telecom, with no extra work for his team. It came back at more than $175,000 a year, and monthly monitoring keeps the savings locked in as lines grow.

In each case the work started with a single category.

The Five-Question Test

Here's a simple test. If you can't answer these in a sentence each, that's where to look first.

• When did you last benchmark what you pay for payment processing?

• How many phone and data lines are you paying for, and how many are in use?

• Who owns each recurring contract, and when does each one renew?

• When was your property, casualty and workers' comp coverage last shopped to the market?

• What is one more point of EBITDA margin worth to you at exit?

Where to Start

Inventory your recurring contracts: vendor, annual cost, renewal date and who owns each one. Pick the biggest recurring-spend category, since that information isn't confidential. Benchmark it against the market, ideally with a specialist who sees that market every day rather than renegotiating alone.

Then decide what to change, and name the person who monitors it, so the savings stay locked in.

One Last Thing

The savings were never hidden. They were just waiting for someone to look.

Full disclosure: I'm a co-founder and co-managing director of Scaling Up Profits, which launches this month to bring this kind of review to companies through Scaling Up coaches and a network of specialist partners. There's no upfront cost to find out what's in your overhead.

Scott Mandell is a certified Scaling Up coach and the founder of Mandell Strategic Growth. He is also co-founder and co-managing director of Scaling Up Profits, a cost-savings platform. He founded and scaled Enjoy Life Foods from startup to a successful acquisition by Mondelez International in 2015. He works with founder-led and privately held middle market companies in the $10M–$150M range. Schedule a call to talk about your business.