When is the last time you took a long, detailed look at your monthly bills? Do you know exactly what products and services your vendors are charging you for? Are you sure these charges are accurate?
The simple truth is that senior managers rarely have the time to give these expenses the attention they deserve. “Small” expenses like maintenance contracts or phone bills can seem like minor concerns compared to operational efficiency, new marketing initiatives or expansions. But any mistake, if unnoticed, can add up to a big financial loss in the long term.
Overpayments to vendors are a widespread problem for any QSR franchisee, especially those with multiple locations and multitudes of vendors. The sheer volume of bills can make it hard to tell when expenses are too high. Owners and managers expect the accounts payable staff to catch mistakes, but usually they can only prevent overpayments or duplicate payments. Combing the line items on various vendor invoices is time consuming and, often times, bookkeepers won’t know if the fees are accurate or excessive, especially if they don’t have the vendor contracts.
According to the Association of Certified Fraud Examiners (AFCE), the typical organization loses an amount equivalent to five percent of its annual revenue to fraud every year. This amounts to over two-and-a-half weeks’ worth of sales down the drain. Fraud can take on a variety of forms, but vendor fraud is one of the most common.
Sometimes these are honest mistakes. But, because we frequently uncover overcharges, it suggests some vendors engage in a systematic effort to overcharge their customers. Recurring billing errors add up fast, and if you aren’t regularly negotiating for better pricing with your vendors, your monthly bills may be eating too much into your bottom line.
Vendors rely on a variety of methods to overcharge their customers, such as vague contract terms, minimal billing statements, and opaque pricing policies. Therefore, these losses are widespread throughout the industry and hard to avoid, and do not reflect a failure of management. However, it is incumbent upon companies to take proactive measures to examine costs with a critical eye and do whatever possible to minimize unnecessary expenses.
In our analysis of expenses for thousands of franchisees, primarily in the QSR industry, we see a handful of issues pop up over and over again. Here are our four tips that will help you avoid overpaying:
Tip #1: Avoid Restrictive Contract Terms
Unfavorable contract terms can leave you stuck with a vendor even if their service goes downhill. Keep an eye out for excessive term lengths and automatic renewal clauses. Try to sign for a 3-to-5 year initial term with month-to-month renewal thereafter. This will lock in good pricing, while giving you flexibility to change or cancel service after the initial term if you need to.
Tip #2: Check for Contract Compliance
Make sure you always have all your vendor contracts on file and readily accessible. Reference them on a regular basis and make sure your vendor is in compliance with their original agreement. Most contracts specify pricing and limit price increases—for example, a three percent annual increase, or an increase based on the Consumer Price Index (CPI). However, it is extremely common for vendors to disregard these limits and increase rates by much more. They may also be charging fees that aren’t referenced anywhere in the contract. If you never agreed to pay extra fees, don’t pay them. Hold vendors to their word and insist that they stick to the contract. If you catch any mistakes, you won’t just prevent future losses; you may be able to go back and get credit for overpayments against future costs.
Tip #3: Optimize Your Services
Operational needs can change over time. Just because you signed up for certain services at a specific location years ago, doesn’t mean that the same location needs the same level of service today. Many people don’t realize they are being over-serviced and few vendors will make mention of it.
Excessive services come in a variety of forms. You might be paying for 10 phone lines per store, when you may only need two or three. Or, your trash might be getting picked up more frequently than it has to. Regardless of the reason, over-service mean excessive costs, many of which can be cut without disrupting operations.
Tip #4: Drive a Hard Bargain on Pricing
There’s an old adage that you don’t get what you deserve; you get what you negotiate. This is especially true for vendor services, for which cost and competition can vary significantly from market to market. By reviewing data from our past projects, we know the vendors’ profit margins and the best rates available in any given area. For an individual company, it can be harder to determine. It can never hurt to shop around, and you may be surprised at how much your vendor is willing to come down on their rates.
Conclusion
How should you begin implementing these ideas? The first step is to conduct a thorough, internal audit. Whether you assign the task to members of your staff or an outside firm, be sure they have the time and resources to do it right. It can be tremendously helpful to get another set of eyes on your expenses.
And of course, the best way to recover losses and overpayments is to never allow them to happen in the first place. Be vigilant and question anything new that pops up on your bills. View each contract expiration as an opportunity to negotiate, or shop around for a better deal. Take time to periodically review the services you’re paying for, and re-evaluate whether you need everything you’re getting. By adopting these habits, you’ll avoid one of the silent killers of your annual budget: small, recurring monthly expenses.
