Passing Over Dollars to Pick Up Pennies

RESEARCH TRIANGLE PARK, N.C. ( MainStreet) -- One of my first jobs was working in a small business. I learned a lot -- one of the biggest lessons being not to pass over dollars to pick up pennies.

What I mean by this can best be illustrated by what I consider one of that business owner's "classic" actions. Because it was a small business, every penny spent mattered substantially to the cost of each project and to the business as a whole. One of the biggest expenses was the printed materials, everything from marketing fliers to a monthly newsletter. Marketing materials stayed essentially the same: a simple black and white, one-page document that described the services provided, benefits of the services and how to contact the business for more information.
Be careful when making decisions on how to "save" money. The real, total cost might look a little different -- like passing up a dollar to pick up a penny.

This was in the "old days," before Internet marketing, desktop publishing and laser printers, so print shops were true print shops: Jobs took significant time to set up, and substantial setup costs were required for each job, unless you had an unchanging design and made regular orders. Delivery and shipping costs also applied.

This small business usually distributed an average of 500 fliers per month to existing and prospective customers, as well as around 5,000 copies of the monthly publication. The setup cost for each of these jobs was the same: around $50.

One day the business owner came in and was excited that he had found a one-cent savings per page for the flier and a savings of 10 cents per copy for the newsletter in a town 60 miles away -- a round trip of 120 miles for three hours' total drive time). So he would save $5 on the fliers and $50 on the cost of the monthly publication and would have to pay $50 in new setup costs at the new supplier for each project, or $100 in setup costs plus the cost of gas and his time (this was a three-person operation)!

The total cost for the new vendor was $100 in setup costs, plus $20 for the fliers, plus $2,450 for monthly time, PLUS three hours of travel time (at a calculated $100 per hour) plus gas and mileage for 120 miles, at $12. His total cost while "saving a penny" was $2,892.

Across the street at his regular printer, he had zero setup costs on the flier and incurred a reduced cost ($35) of setup for the newsletter, since only the interior content ever changed (and not the covers). So his total cost at the existing supplier was $35 in setup fees plus $25 for one-page fliers plus $2,500 for the monthly newsletter. Total cost: $2,560.

Comparing the total cost of the out of town "deal" resulted in an increase cost of $332 over his regular vendor.

Did this small-business owner save the penny or the dollar? He picked up the penny because when he looked at the cost of the "project" he looked only at the per-copy cost of "saving" of one cent per flier and 10 cents per newsletter.

Today the same type of analysis occurs when organizations look at their options. Total costs of an opportunity must be considered, not just the obvious ones.

Another example of focusing on pennies and spending dollars are the business people that spend money on a "bargain" piece of equipment. They can get a "deal" on a new server, computer, copier, chain saw, backhoe, whatever ... but they have to buy it now or miss the deal. The only catch? They do not need it.

Buying the item will not make them more efficient, reduce costs or get more customers. But they saved money on the item. In reality, they spent money that didn't need to be spent. Look at what was spent and not what was "saved." If the business spent $800 on a $1,600 item that can help increase profitability and efficiency, then, yes, they saved $800. But if they spent $800 on something that really wasn't needed, they overpaid $800!

Be careful when you are making decisions on how to "save" money, reduce costs and budget for your business. The total cost of any action and its impact financially, operationally and strategically need to be considered. Spending money to improve how your business operates, saves time, increases results for your customers or makes it easier to do business with you is a good investment (if you can afford it), and where you spend the money is truly where it will generate results.

A penny saved may be a penny earned; a dollar not spent is 100 pennies saved and earned.

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Lea Strickland, M.B.A., is the founder of Technovation Entrepreneur , a program that helps entrepreneurs turn their ideas into businesses. Strickland is the author of "Out of the Cubicle and Into Business" and "One Great Idea!" She has more than 20 years of experience in operational leadership in Fortune 500 and Global 100 companies, including Ford, Solectron and Newell.