Financial obligations, why your business needs to start tracking them now.
Every year it seems the media breaks a story where a city or state entity has lost track of one of their leases and ended up paying an extra year or 5 in renewal payments. The news will sum up all of the payments that have been made and compare them to the purchase price of the asset that the lease payments were made on. The number is usually upsetting to taxpayers.
If you lease or purchase an automobile, the longer the term of your contract the lower the monthly payment is. A 24 month lease payment is going to be considerably more than a 60 month lease payment. If a consumer opts for a 24 month lease term, they usually do that because they want the flexibility of upgrading their car after a few years. Whereas the consumer opting for the 60 month term places a higher value on the lower payment over upgrading their car to the latest and greatest thing. Lets say you want the latest and greatest so you opt for the $800 per month lease payment for 24 months over the $650 per month 36 month payment. On month 25 you find you forgot about your car lease and it has now renewed for 12 more months. To add insult to injury, the payment also had an escalator clause so now your payment is $840 a month. Now you are paying a 24 month payment for a 36 month term….and then some. Now most people will say that would never happen. We are all over how many months remain on our vehicle leases because it is a count down to a new car!
How many months remain until you can upgrade your cell phone? I bet most of us know that.
How many months remain on your corporate cell phone contract for your business? Or on the leases for the work trucks? Or on that postage meter? When is that workers comp coverage up for renewal? When do the tags expire on your vehicles?
To run a great business, we need to treat our company’s money better than we treat our own. For most businesses it is just the opposite. Most businesses are regularly making 24 month payment amounts over 36, 48, even 60 month terms. A leasing company will rarely give you warning a lease is about to renew because it is a huge revenue source for them. Your insurance agent can increase your premium 10% across the board and renew your policy for another year. All the business sees is a new COI. We tend to proactively negotiate our first contracts with a supplier and after that we just accept what we are billed.
Annual escalations are very common in all kinds of agreements. These escalations allow our suppliers to increase the payment in our contract by a set percentage each year. They may claim its based on the Consumer Price Index to cover increases in their cost. If you allow a contract to constantly roll over, it may very well be escalating every year as well.
By tracking your contracts and their end dates, you take a pro-active approach to managing your business expenses. You may like your insurance agent and have no intent of leaving him, but 60 days before your policy is renewed, ask your agent for a new quote and check around. If they know you are shopping them, they will make sure you are getting a great deal.
Often engaging other suppliers for quotes helps us find out about new products that may be a better fit for our businesses.
Have you ever noticed when you have a new supplier in bidding for your business, 90% of the time their bid is designed to show you a savings from what you are currently spending? By allowing contracts to automatically renew and escalate every year, you end up paying 20-50% more for something that is out dated.