I have asked many employees and business leaders that very same question. How much does a penny cost?
Sometimes we can get a penny so close to our eyes that we block the view of a dollar bill on the other side. I have witnessed this business mistake more than what should ever be experienced. There are some simple monetary rules that apply here. Unfortunately, business decisions often forget to apply these simple monetary rules. Those who are "in charge" or "responsible" for managing the profitability of a business often get so consumed with squeaking out every cent of profit, they miss the cost they expel to bring that cent home. There is an art that must be learned and practiced to help decision makers in business to properly manage the profitability of each penny. It is an art.
I am of sorts, what they might call a "penny pincher." I watch every cent as if it was the last one I might ever see. It is an obsession inside my character make-up. Most business owners have the same affliction. As a boss, the employees get tired of hearing about every missed opportunity to save a penny. I can assure you many of my past employees still tell stories about examples that exhibited my penny pinching ways. I always figure if a person cannot manage a penny well, how can they truly believe they can manage a million well? Patterns are patterns. Be very careful how you develop your patterns.
As good as it might seem, penny pinching characteristics can be very damaging to profitability. When the penny gets too close to the eye, a lot of dollar opportunities may become difficult to see. A business owner can cloud the view of some money making opportunities or fail to see the path to take advantage of cost saving measures. I have some great examples to prove this point. Some of them seem ridiculous, but many leaders have actually practiced them. The art of chasing pennies can become very difficult to paint.
Years ago I was a young "department" manager of a large retail store. I was learning a lot about the job I was given to do. I had dreams to climb up the company ladder and become a "big shot" manager in the corporate office of that firm. At the end of every month this company had a routine process of marking down slower selling products. As items aged enough on the inventory list, they hit a recognized age known as "X" stock. That means the item hit the 13th month of ownership by the store. Too long to have hanging around anymore. It was time to work on getting rid of it, profitably. Each department manager was responsible for the profitability of their categories. The amount of "X" stock in their categories was discounted by small percentages to be set against the profits they generated. In other words, the computer system had set in place some monetary motivations for getting rid of older stock. Unfortunately, giving the item away meant no revenues at all and every bit of the retail value was set against the profits as a total loss to the department. The "department" managers would be forced to use their skills to move old stock with as much profitability as possible. It became a serious game.
I also learned how to call other stores when it became clear to me the stock amounts of particular items I managed were too large to avoid winning the 13-month aging game. I learned how to use the computer and see what other stores in our company were selling. I learned how to log on and examine their "X" stock lists and rates of sale reports. I would call the other store department managers which appeared to move some of my slower moving items faster than my departments could do. I would suggest transferring my slower moving items to their store on the regular "inner-store" transfer trucks. The computer was designed to take the last one in to ship out. Inner store transfers were considered to be an extra over sale for a customer, so the most "fresh" stock was the one the computer was designed to select. The fresh stock had the best chance for being in the best condition. The software could not be changed, but the item location could be seen. I would physically change the items from one location to the other. When the picking ticket for delivery was issued, the older item would be selected. It would come up as an exception on the merchandise control office managers desk and get buried. She had way too much to do as it was. When she worked that exception report, she made quick adjustments and assumed the old one was the one shipped. Which it was. She had too much to do to be concerned about searching for the right item in the wrong location and devoting unnecessary time with other staff and warehouse members to correct it. My "X" stock was comfortably reduced...at full value. Pennies saved. My department reports were becoming squeaky clean. (We will not dig deeper about how much this shifting actually cost the company! That is a separate discussion. I know.)
Eventually the slick position of my report profitability attracted a visit form a group of corporate office leaders. One of those leaders was the owner of the company. He rarely made personal visits to any of the stores. My store manager did not alert me of the purpose for their visitation. I had no idea, until later, why they were making a store visit to our location. Keep in mind I was full of energy, eager to learn and doing as much as I could to manage all portions of my departments, well. I had very good department management structure and a lot of really great staff help.
When they attended our store with that visit, I met the owner for the first time. He was a man with a big stature. In front of every corporate person standing near all of us on the showroom floor, including my store manager and his assistant...the owner of the company asked me one question. He asked me who I had used to make all of my end of the month sale tags. The sale tags are the large slip tags you use to place over the regular price when you mark an item down with a discount. I used professionally printed tags with nicely priced felt pen writing. They were made with care. They looked like it. I could see the gleam in my store managers eyes. He was proud of his young manager who had attracted this group to examine our success.
He paused for what seemed like ten minutes. It was very quiet at that point. He very politely explained, "This store produces 18 million per year, correct?" I said, "Yes." He then taught me a lesson about the art of managing pennies. He said, "Every single sale you produced on every item ending with 95 cents instead of 99 cents is costing you 4 cents per sale. What do you think that adds up to in a year with a store of this size?" I was less exuberant to reply, but said, "I don't exactly know, sir." He said, "I looked it up on your annual reports at my office before I came here. It was over $1,000 last year. Should I take that loss off your monthly salary? You apparently took it off of mine." He continued, "Young man, the reports you generate are very good. But what do you think it would cost me to lose 4 cents every time my company sold a lifetime of items? It could reach a million in a hurry. Change the endings of your numbers, the customer does not care if it is 95 or 99. However, I do." The group remained silent. Again I replied, "Yes, sir." Only this time my posture completely disappeared!
The art of managing pennies is an art that must be understood if you are to be a winning business owner. Manage your pennies much better. Make the adjustments on the minor stuff that is costing you 4 cents on every sale. It does add up.
Until next time...
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