Of all the costs that new business owners tend to overlook, the most common, according to Mike Michalowicz, is hiding in plain sight.
“Inevitably, the most expensive employee at a company is the owner,” says Michalowicz, host of the Business Rescue segment on MSNBC’s Your Business and author of The Pumpkin Plan. “Because we own the business, we think the first employee we hired is the most expensive, or it’s the person we pay the most in salary, but we never consider ourselves.”
When business owners use working time to do something other than make money, productivity is lost, Michalowicz says. “It would be absurd for me to say to my most expensive employee, ‘Hey, can you run out and get some food for the rest of the office and skip all of the activity you’re doing?’ And yet, with ourselves, we do it all the time,” he says.
Here’s some expert advice on how to organize your business without forfeiting quality service.
Calculate Personal Time
Michalowicz says a lot of small-business owners take on the most remedial tasks without realizing the cost of doing so. “The cost is huge because they’ve taken their best employee off revenue generation and servicing clients,” he says. “I suggest entrepreneurs look at how much they’re paying themselves during the year. That is their minimum salary, meaning some pay themselves less than they really earn or deserve because they don’t have the money. So, if I take out $100,000 from my business in a year, that number should be divided by 2,000, because there are roughly 2,000 working hours in a year. That means I’m paying myself $50 an hour.”
In this case, a two-hour errand, like buying and picking up lunch, would cost that business owner $100, plus the price of the food. “If I send out someone who makes $10 an hour and they get the task done, that costs $20,” Michalowicz says. “We have to really value our time and understand the costs associated with it. Most times, entrepreneurs do not appreciate or understand how much their time is really worth.”
Choose To Conference Call
While it may sometimes be a good idea to meet with current and prospective clients in person, Barbara Weltman, author of The Complete Idiot’s Guide to Starting a Home-Based Business, says traveling costs add up quickly. “There are times when you have to meet in person, but maybe there are other times that you don’t have to be there,” she says.
Weltman maintains that even a handful of changes per year from in-person to virtual meetings can save a business owner a great deal of money in the long run – especially if the travel distance is considerable.
“We had a project in which we used to meet in person twice a year to plan out the next six months. But now, we meet in person once a year, and the other time, we do it by conference call,” Weltman says. “We can get the work done, but we don’t have to meet in person each time.”
Embrace The Cloud
Speaking of virtual solutions, Weltman is a proponent of cloud computing – a reference to a number of online services that store important documents on a website or mobile application for use on electronic devices. “Moving to the cloud will put you on a fixed monthly budget because you’ll pay X amount for the service every month, and you don’t have the backup costs that you have when you use desktop storage,” she says.
Michalowicz says the cloud, along with Skype and an online phone system such as Grasshopper, can eliminate a number of your electronic in-office needs. “I used to need a file server, or at least something that could store my data at my office, along with a phone system,” he says. “The cost that it alleviates is the cost of having office space, which is simply the recurring cost that is used to store equipment and people. And the best part is the mobility it gives you.”
Of course, many distributors need some kind of office space to store overhead – but if you’re near the end of your lease at your current office building, Weltman says now may be the time to go virtual in as many ways as possible, including having some of your employees telecommute. “Maybe they don’t all have to be on the premises,” she says. “So, you can save on overhead with your space.”
Look Into Elance
Maximizing employee efficiency is hard to do, but it’s critical if you want to cut costs. Again, Michalowicz recommends doing some self-evaluation. “For example, if you take home $60,000 a year, divide that by 2,000, and you’ll see that every hour you spend doing something costs you $30,” he says. “Instead of spending ten hours on a project, it is cheaper to pay $100 for someone else to do it.”
For that purpose, Michalowicz is a proponent of a site called Elance.com. “It’s similar to Monster.com, but Elance focuses on the freelance community,” he says. “I think it’s the most beautiful platform out there because I only have to hire workers for the period of time they do my work, so it represents a huge savings for me. Traditionally, small-business owners would say, ‘I need to hire an employee full-time or part-time.’ But when you do that, you’re paying a person at times to stand around and not do what they do best. By using Elance, you optimize your workforce.”
Michalowicz has hired freelancers for writing, programming, virtual administration and support, and even logo design work through Elance. “I found my current assistant through Elance,” he says. “You name it, it’s on there.”
Hire The Right Accountant
Even for business owners who stay on top of their finances, Weltman says having a financial professional review your books on a regular basis is always a good idea. “Hiring any accountant might not be the solution,” she says. “You have to hire the right accountant who’s going to be proactive in helping you find ways to cut costs.”
Weltman says the best way to find the right accountant for your company is to talk to people whose opinions you value. “It’s like finding your family doctor – get the best referral you can from someone you know and trust,” she says. “Maybe your banker, insurance agent, or lawyer can refer you.”
Understand Subscription Costs
A monthly subscription for software applications or independent business support may seem much more appealing than an expensive-sounding one-time purchase – but it isn’t always the best long-term financial decision for your business.
“As business owners, we see that the monthly cost is low compared to a one-time cost for buying the software outright,” says Mike Michalowicz, host of the Business Rescue segment on MSNBC’s Your Business and author of The Pumpkin Plan. “We see it’s only $12 a month in software instead of a $500 purchase, or the IT support is only $400 a month as opposed to a $10,000 network. In the moment, it seems like a big savings, but as time goes on, those costs add up. They’re almost invisible because they seem insignificant on a monthly basis, but when you add it up over a year, they’re extraordinary.”
That’s why Michalowicz recommends performing a long-term cost analysis when weighing such purchases. Using his example, a business owner who spends $400 a month on IT support will spend $14,400 for that support over a three-year period – nearly 50% more than that owner would have spent on a one-time $10,000 purchase.
“It’s a marketer’s dream on the other side,” Michalowicz says. “If I’m selling something, I know people slant toward what some of the immediate savings are, but rarely look at the long-term costs. So, do that analysis, and really understand the long-term costs.”