“Frugality includes all the other virtues.” -Cicero
The best way to make more money in your beer business is to spend less money. Plain and simple.
However, it gets complicated when you try to figure out where, exactly, to cut back.
In this article, we’ll talk about the power of Purchase Orders to help you control spending in your distribution business. This simple tool will help ensure that the hard-earned money you spend on supplies, materials and equipment is spent properly.
A purchase order is a document issued by a buyer (you) to a seller (your vendor) that indicates the type, quantity, and price of products or services. It is used to control purchases, and it is used to control company spending.
We all want control in our life and in our business. When done properly, the purchase order will give you control over your cash.
How to control spending in your company:
- Approve the spend before making the spend. Too often, it’s done the other way around.
- Get the details. What are we buying and why?
- Understand the Cash Flow – what is the impact of spending on cash flow? How much spending, and when?
First, Approve the Spend
Most of the time, we buy what is needed and we figure out the details later. It seems like the right thing to do, but it can cost your beer business a lot of money in unnecessary spending.
First, have someone in your company approve all spending over a certain limit. The limit can be $1 or $500, whatever is a material amount for your business. The simple fact that a second person will be reviewing and approving any expenditures will reduce spending.
Human nature is a funny thing. If you know someone is going to double check your work, you will make an effort to make sure you’ve done it right.
The same thing goes for spending money. If you know someone else is going to check your decision to spend money, you’ll make sure you’re spending it properly.
Have your managers fill out a simple form, a Purchase Order, for any spending over $100. Let managers know that you will review any requested spending over the limit.
Tell your managers to do the research before the spend.
- Do we really need to buy this? What is the business need?
- Can we buy this cheaper somewhere else? What other vendors have you checked with?
- Is there another way to solve this problem without spending cash?
A few questions can save a lot of dollars.
Get the Details, What are We Buying?
Managers who request to buy things know the details of the purchase. Make sure they write it down on the Purchase Order, so everyone else knows the details, too.
I’ve seen many purchase orders that do not describe what is being purchased. The form might say, “supplies” or “spare parts” or something equally vague. A lack of details makes it difficult to determine what was purchased (and why).
Insist on a good description of what is being purchased. This will save time when reviewing the purchase order, and give a clear picture of what is actually being purchased.
Teach your managers to use general ledger numbers. These are the heart and soul of the financial statements.These are the categories of where the money is being spent.
General Ledger account numbers create the financial statements. Give your managers a list of the general ledger numbers they need to know. This will help make sure that expenses they incur end up in the right bucket on the financial statements.
Your managers know the spend best. Teach them to write out good descriptions and how to use general ledger numbers so that everyone knows what you are buying.
Understand the Cash Flow
Cash is king. Purchase orders will help you understand the cash flow of your beer business.
- What do we plan to spend?
- How much cash do we need, and when will we need it?
- How much cash (or borrowing capability) do we have?
By using purchase orders you will have not only advance approval of any spending, you’ll have information to answer each of the questions above.
As noted in the Art of Cash Flow Guide, the first rule of business is Don’t Run Out of Cash. Purchase orders will give you visibility of upcoming cash flows so you don’t run out.
Wrap Up + Action Items
A little form called a Purchase Order will give you big control over company spending.
Print this form and insist that your managers use it. Have an owner, GM or other higher-up approve any spending over a certain limit.
Insist that your managers provide a good description of WHAT they are buying and WHY they need it. Are there alternatives to making the spend? Can the item be bought cheaper elsewhere?
This process will give you control over spending and help you cut costs on your income statement.
You work hard for every dollar that comes into your distribution business. Ask some tough questions before spending money.