Using Cost Savings To Fuel Your Retirement

The Importance of Managing Costs

Managing costs is vital for any business. But we view it as even more important than managing a Profit and Loss statement — it is the key to your family’s future.

Consideration: Funding a Vendor’s Retirement Account vs. Your Own

Imagine a business operating for 15 years and during that time, they overpaid a vendor by $20,000 each year. By sheer math the business is out $300,000 ($20,000 * 15 years). But if that vendor invested each annual over-payment at five percentage points above the historical annual inflation rate of 2%, then their retirement account would be worth more than $500,000.

Our objective is to do exactly this — but for you. We build retirement accounts for business owners by reducing business costs and directing the proceeds toward your retirement. As a result, your retirement fund grows without the need to increase discretionary, personal contributions.

It sounds crazy that any business would overpay a vendor. Yet it happens every day.

Based upon our experience working with professional service businesses with annual revenue of $3,000,000, we have identified three major categories of cost savings that are available to virtually all service businesses, including:

– Credit Card Processing Fees (typical annual savings of $25,000)

– Leases and Loans (typical annual savings of $12,000)

– Employee Compensation (typical annual savings of $20,000)

We help clients obtain these savings to fund their own retirement plan. These typical annual savings alone produce a pre-tax retirement fund of nearly $1,400,000. To view the potential impact for your own business, please try our online calculator.

Reducing Credit Card Processing Fees

The vast majority of professional service organizations continue to use their original contract to accept credit card payment from customers. Often these early contracts charge higher fees based upon outdated risk metrics and a lower volume of credit card transactions.

As the current market for credit card processing business is highly competitive and your business has likely grown—in terms of operating history and the volume of payments you accept via credit cards—most professional service organizations can negotiate substantially lower credit card processing fees.

For example, a $2,000,000 per year business that accepts half of all payments by credit card can, through proper selection and negotiation, reduce their credit card processing fee from 3.0% to 0.5%. This results in a 2.5% savings on $1,000,000 or $25,000 each and every year.

Renegotiating Leases and Refinancing Loans

The manufacturers or distributors of medical and office equipment often provide leasing to help sell their products to you. While you’re happy to avoid large up-front cash outlays, the leasing terms are often sub-optimal for you.

By examining your leases and negotiating with the leaseholder or obtaining alternate financing, we often save our clients $1,000 per month—or $12,000 per year. For newer equipment with an average 10-year life, this results in the savings of $120,000.

When investing these annual savings at five percentage points above inflation, this amount will contribute $232,000 to your retirement without decreasing your income by a single dollar.

We will also review any outstanding loans to identify savings that can be obtained by refinancing or eliminating current debt—resulting in additional annual cost savings.

Right-Sizing Compensation

Reviewing Employee and Professional Service Compensation

Often accountants, CPAs, lawyers and other professional service organizations charge fees that were historically fair but are, today, beyond the norm. Without jeopardizing relationships, we engage as a third-party to review the services rendered and negotiate lower, mutually beneficial fees.

As labor is the predominant cost component for most service organizations, we’ll review staffing models and compensation levels based upon industry best practices. We often recommend incentive-based compensation that drives productivity, enhances employee morale and decreases costs. We also review employee benefit programs to identify additional cost saving, but still feature-rich plans.

While these annual savings vary by firm, we typically save business owners anywhere between $20,000 to $50,000 per year—depending upon the nature and size of the organization.

Over a 15-year period, annual savings of $20,000 produces $300,000 that can be applied to your retirement fund. And when invested at five percentage points above inflation, this amount will grow to $502,000.

Bottom Line

Viewing the Real Retirement Impact of Cost Savings

We’re different from other advisors as we believe increasing the profits of your business is an exceptional wealth generation vehicle.

Rather than writing checks that decrease your income, we employ cost saving techniques to fund your retirement so your income remains entirely unaffected.

Below you can enter parameters that reflect your individual business and see the detailed impact of annual cost savings compounded over time managed using our Confidence Investing approach.

Please call us at 888.827.2330 if you would like to discuss how to acquire the cost reductions outlined in our newsletter.

The Importance of Managing Costs

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