Boost Profits 50% by Strategic Purchasing

Purchasing may not be quite as razzle-dazzle as creating exciting marketing campaigns, but it can be just as crucial to your bottom line. If your business has a profit margin of 10 percent on sales and you cut expenses by just over 5 percent, then your profit will soar by 50 percent! Without changing the profit margin, sales will increase by 50 percent to achieve the same result.

What Is a Spec Sheet, and How Do I Create One?

Before making purchases, you need to create exact specification sheets for the items you want to buy. For items such as office supplies, developing spec sheets won’t be very time-consuming, especially if you purchase some items on a regular basis.

What should a spec sheet include? Let’s assume that you want to purchase a computer. You may not want to specify a particular brand and model. You may, instead, want to specify a price ceiling or price range. You will need to list any special computer features or options that are necessary. And you may want to list features and options that you would like if price criteria can still be maintained.

Spec sheets should also specify delivery times, warranty or service requirements, and payment terms such as COD, net 30, or credit card use.

How Should I Evaluate Potential Vendors?

For some products and most services you will want to prequalify vendors by getting testimonials from satisfied customers, reading product reviews, visiting vendor plants, meeting with key personnel, or perhaps sampling the product or service.

How Should I Request Quotes from Vendors?

Once you have developed your spec sheets and made a list of eligible vendors, you are ready to go out for quotes. For almost any purchase of $300 or more, I recommend that you get at least two quotes. If the item or service being purchased costs $2,000 get at least three quotes.

Never just send out a written request for a quote, or the vendor will be unlikely to give your request serious attention. Always talk to a salesperson. If it is a significant quote, meet with the salesperson face to face.

Never hesitate to ask a salesperson to come and visit you. Often a salesperson can influence the price and other terms attendant to your order. If the work involves developing a quote, the sales representative can usually push the estimator to work within a tighter margin.

Even if the company offers standard pricing, a sales representative may be able to extend higher volume pricing to you if you establish a good rapport. Especially if yours is a new business, a good word from the salesperson to the credit manager may mean the difference between cash in advance and 30-day terms.

What Should My Purchase Order Look Like?

Once you have decided on a vendor and are ready to proceed with a purchase, it is always a good idea to use written purchase orders. If you don’t use purchase orders you are going to find yourself receiving goods and services that are the wrong style, type, or color than those you ordered. You may be charged a higher price or sent the wrong quantity.

The purchase order should specify the name of the item or service being purchased, and any details specified in your spec sheet. You need to state the quantity being purchased, delivery date, delivery address, shipping method and payment, and packing and receiving requirements.

You should detail each cost you are incurring, and also state the total cost of the items or services ordered to avoid misunderstanding. It is also a good idea to use purchase orders printed with your company name. If you don’t, you are more likely to be asked for a prepayment or deposit on goods or services ordered.

What Is the Process for Accepting an Order?

When the product is delivered, be sure that whoever signs for the package also inspects the order. When you sign for delivery from a trucking company or other shipper you are generally agreeing that the quantity is correct and that the shipment bears no obvious damage. Have your shipping and receiving department or other personnel count the quantity or number of cartons delivered. Receiving should also check for any visible damage to the outside of the shipping containers. Receiving needs to get a copy of the receipt for delivery that has been signed. This will serve as your receiving slip.

As soon as possible, the shipment should be opened and inspected. Quantity, quality, and adherence to purchase order specs should be checked. If there is any problem, you are in a much stronger position if you call the vendor and point out discrepancies immediately.

Don’t hesitate to complain about problems or seek improvements. Call the salesperson you have been dealing with. Most vendors want to build long-term relationships with their customers!

What Should I Look for in an Invoice?

Eventually, you will receive an invoice for the merchandise or service you have purchased. Compare your purchase order and receiving slip against the invoice. Don’t be surprised if the invoiced payment due is higher than the purchase order total.

Many businesses are very good at adding extra charges. They may state price increases or cite some “minor” charge that they neglected to inform you about up front. Call them. Say, “Too bad!” Your purchase order specifies exactly what you intended to pay for the merchandise or service and you are not obligated to pay for any additional charges. Be firm, but be polite. You can always say that you will be happy to pay the hidden charges next time—that is, if you use the vendor next time!

Takeaways You Can Use

  • Often it’s a lot easier to dramatically increase profits by cutting your expenses rather than by increasing sales.
  • Just a small decrease in expenses can have a dramatic impact on your profit margin.
  • You should have a highly organized process for both purchasing and invoicing.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.