Capital: Optimizing Purchase and Cost Decisions

by Vincent L. Rogers

It has been said that the number one reason for business failure is under-capitalization. Yet stories abound of legendary business successes that lacked adequate resources in their formative stages. Conversely, well capitalized businesses often fail miserably. What ultimately proves to be the key reason for the success of most businesses is passionate entrepreneurial leadership and visionary strategic planning.

Yet when it comes to business success, money certainly matters. However, in many cases it isn’t how much cash you have access to that determines viable cash flow. More importantly, spending the cash that you have efficiently has the greater impact on long-term business success or failure. The greatest source of future revenue and profits for your business will be determined by the purchasing and cost decisions you make today.

In fact, many well capitalized businesses tend to purchase things outright with their cash rather than pursue other more optimal ways of acquiring the things they need. Some well capitalized businesses often tend to try to find a reason to buy everything; instead of finding a way to avoid buying anything. In many instances, having the money to buy something often creates the false perception that the company can “afford” acquisitions that are often ill-advised or more appropriate at a later date. Should the business ultimately fail, they are then stuck with a lot of illiquid assets on their balance sheet and defaulted loans or angry investors.

It is important that you look at each cost and purchase decision you make as a link in your “value-chain”. In other words, does the associated cost and terms of making this acquisition add long term value to my business? Does making this expenditure enable me to offer a higher quality product or service to my customer? Making purchasing and cost decisions in this way also puts you in the habit of thinking about your business strategically at all times.

Making good purchase decisions doesn’t always mean getting the lowest price. Spending a few dollars more for a higher quality product or with a better established supplier can often lead to more satisfied customers, quicker delivery times and even gaining referral business from the supplier. Also, it may be possible through negotiation to convert a prospective vendor into a business partner instead. Sometimes this can be done without having to pay anything.

For instance, it may be worth more to the local sandwich shop to cater your roundtable meeting of local Executives for free or reduced costs in order to market their business to the purchasing managers and decision-makers attending the conference. You should always be looking to cut deals that benefit your bottom line, rather than being a free spender of your company’s scarce resources. Other ways to cut costs may be to share office space with strategic companies, bartering your goods and services in exchange for the things you need and buying used office equipment and furniture rather than buying these things new.

It may not always be easy to weigh every factor of each individual purchase. However, failing to examine the key factors of buying may prove to be disastrous. As the fictional character Gordon Gekko stated in “Wall Street”, the classic Hollywood film “A fool and his money are lucky enough to get together in the first place." As difficult as it is to find the money to start and grow a successful business, surely the last thing you want to do is make the avoidable cost and purchasing decisions that often lead to ultimate business failure.

Vince Rogers is a highly skilled resource manager and communications consultant; trained in economics, marketing, project management and commercial real estate management. He possesses many years of successful experience in financial asset and real estate wealth building. He is the Principal Change Agent at Vince Rogers & Associates @ www.vincerogers.biz

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