Thinking Beyond The Budget Year

Depending on what part of the country you are in, it will soon be budgeting season. That mix of calculations, best guesses and S.W.A.G’ing. It has always been that yearly process of estimating sales, expenses and profits for the upcoming fiscal year.

Did you ever once stop to ask yourself why?

Why are budgets done for 6 month, 2 year or 5 year increments? Obviously budgeting for longer periods of time factors in many more variables.

From a purchasing point of view longer horizons can lead to greater savings. Being able to negotiate pricing based on longer time periods, increased units and locked-in business for the supplier allows for greater leverage at the table. It can lead to a win, not only for the property but, for the supplier as well.

The WIN for the property:

– Fixed pricing for multiple years
– Savings on product inflation costs typically seen each year (assuming you can negotiate a fixed price for multiple years)
– If your property has the space, larger drops usually equate to freight savings
– Allowing management to focus on other areas

The WIN for the supplier:

– Secured multi-year business with the property
– Larger purchases (which actually allow the supplier to negotiate better pricing from their suppliers )
– Allowing their sales team to focus on new business

Here is a very simplistic example. In most cases, every $1 saved in purchases equates to about $4 less in sales required by the property to make up for the costs (very general rule of thumb).

Traditional Purchase:

Year 1 (5,000 widgets x $50 = $250,000)
Year 2 (5,000 widgets x $52 = $260,000)
Year 3 (5,000 widgets x $55 = $275,000)
Total = $785,000

Multi-Year Purchase:

Year 1 (15,000 widgets x $50 = $750,000)

Savings with Multi-Year Purchase:

$35,000
(Using the rule of thumb above would mean we would need to have $140,000 in sales to offset the additional costs under the Traditional Purchase.)