How does your small business’ purchasing measure up? Whether you’re making capital expenditures or buying supplies and materials are you planning those purchases as well as you could?
When it comes to running a business efficiently, purchasing is often neglected, particularly in small businesses where purchasing tasks are decentralized or handled by several key employees. As a result, you may find that you are spending too much money on inferior products or with suppliers who are a little short on customer service.
So what measures can you take to reign in your spending and put some controls around the purchasing process? Here are 10 tips to consider:
10 Ways to Streamline Your Business Purchases
1. Separate your Personal and Business Banking – If you are purchasing anything for your business, first open a business bank account and apply for a business credit card. Here’s why:
- If you start intermingling personal and business credit, you negate any protection that being an Limited Liability Company (LLC) can afford. A business credit card, used solely for business purchases and expenses, can eliminate this risk as long as it isn’t backed by a personal guarantee.
- The IRS requires that income and tax deductions for business and personal transactions are kept separate. A business bank account can help with this, while a business credit card can make for easier record keeping because they break down expenses by category.
- Credit cards are also an effective tool for building business credit.
2. Have a Formal Purchasing Policy – Now, you may not have a need or even the budget to staff up a procurement team, but it’s a good idea to lay the foundations of a formal purchasing policy – one that defines your desired quality standards, volumes, and price points. Think about the following factors as you define yours:
- Who has authority to purchase? What can they buy and are there any spending limitations?
- What criteria do you use to select vendors – quality, shipping times/costs, etc.?
- How many quotes do you solicit before selecting a supplier?
- Do you enter into formal supplier contract arrangements? What are the acceptable terms?
- Do you have a process for quality control?
- Do you regularly evaluate supplier performance? If you don’t it’s a good idea to do so.
3. Appoint a Go-To Purchasing Function – As a business owner you can only wear so many hats, so consider passing the procurement reins to someone else on your team who can take on this function in addition to their other duties. In this role they will not only place orders, but ensure that your purchasing policies are adhered to, be responsible for vendor selection and management, inventory, quality control, and payment processing.
4. Get a Grip on Inventory Management – Inventory tracking is an essential tool for streamlining procurement, avoiding unnecessary waste, and ensuring you are prepared for your busy seasons. There are many integrated online ordering systems that can help you monitor and manage inventory, sales and shipping lines – automating as much as possible can give you visibility into your business, improve cash flow management, help with inventory control, and ultimately, enhance profitability.
5. Keep Track of Orders – This is where the trusted purchase order (PO) comes into play. Once you’ve agreed on a price with a vendor, raising a PO (a formal request to a supplier to go ahead and deliver materials at an agreed price and terms) will help you stay on top of your purchases when they are delivered and invoiced. Cross check items that arrive with your PO, and again when the invoice arrives. This is the time to spot check quality and quantity.
6. Negotiate Contracts for Quantity Discounts – If you are making repeat purchases from a supplier, use a contract instead of a PO. You may be able to negotiate quantity discounts or simply streamline the process of ordering recurring items. You’ll still be invoiced on a monthly basis.
7. Keep an Eye on Market Fluctuations when Making Purchases – It’s likely that market prices for purchases are going to fluctuate. But what should you do if the price of an item is going up? It may seem logical to buy in bulk now before the price rises even more, but instead, consider buying smaller, but more often and adjust what you charge your customer accordingly rather then get bogged down with a large inventory. Then keep buying small until prices come down.
8. Going Beyond Price, Establish a Good Basis for Choosing a Vendor – Don’t just compare price among a short list of vendors, be sure to dig deeper before you place an order. Look at their credit and payment terms. What about their reputation (do a little research or ask for customer references)? Likewise, don’t throw all your eggs in one basket. It’s very important to have at least one supplier “in reserve” who you can turn to if your preferred supplier lets you down. Having a few suppliers on your books will also put more pressure on your primary vendor to add sweeteners such as discounts or better terms. Furthermore, working with several suppliers also gives you the opportunity to build good business credit.
9. How to Know When it’s Time to Hire Help – If your company’s purchasing process has become too complex or it’s too much for you or team to handle, it may be time to hire a dedicated purchasing manager. Entrepreneur.com recommends doing this if your business meets any of the following criteria: If you issue RFPs or RFQs when making purchases; negotiate contracts with each supplier, or need a better grip of tracking vendor performance. Also if your purchases involve specialized goods – whether technical, chemical, and so on – and the quality of the goods you buy and sell determines the perceived quality of your company.
10. Where to Find Specialist Help – If you can’t afford to hire a specialist, you can also call on the services of SCORE – a government-sponsored network of small business mentors who specialize in helping businesses with business functions from sales and marketing to operations and finance. Alternatively, organizations such as the American Purchasing Society also offer consulting services to members in need of assistance with their purchasing processes.
About the Author:
Fundbox is a technology company disrupting the small business payments market. Fundbox is helping SMBs, freelancers and home offices grow by managing their cash flow better and by overcoming short term cash flow gaps.