7 Tips for Getting Paid

May 17th, 2013 by Doug Boswell No comments »

Not getting paid by clients or customers is one of the most frustrating aspects of running a small business. But when not getting paid impacts your small business’s cash flow, it’s one of the most dangerous, too. What small business owner hasn’t worried about getting paid at some point? Whether it’s the number of customers that are running past due accounts, or the client who seems to be reluctant to pay for completed work, having proactive policies in place that anticipate these eventualities is your best defense.

Here are seven ways to make sure you get paid for the goods and services you sell.

1. Don’t extend credit automatically to new customers/clients.
Small businesses, just like large businesses, need to have credit policies in place that provide guidelines for determining which customers or clients will be extended credit and on what terms.

It may be your business’s policy, for instance, to never accept personal checks as payment, only company checks, debit cards, credit cards or cash.

If you are considering extending credit beyond that point to individual clients or customers, you should have a procedure set up where the customer or client has to fill out a credit application and/or do a customer credit check. The fee for a credit report can seem expensive depending upon how detailed the report is, but it’s definitely money well spent if it prevents you from not getting paid for that big sale.

2. Take partial payment in advance.
If it’s sensible in terms of the price of the goods or services, ask for a deposit or retainer up front. This is an increasingly common business practice for higher-ticket items and services; no reasonable customer should be offended by such a request.

For instance, if you provide services, you might charge a percentage of the projected bill or a set amount as a retainer before you start work on a project with the remainder due on completion of the task. Or break the bill into thirds, asking for a third before work starts, a third halfway through the project and a third upon completion.

The beauty of partial payment is that it ensures that you get paid something even if the customer or client defaults on the rest of the bill.

3. Invoice promptly.
This seems like a no-brainer but many businesses are slow to invoice their clients. And by establishing the degree of urgency with their own example, why should anyone be in any hurry to pay them?

Customer/client invoices should be prepared and presented immediately upon delivery of the goods or services, or as soon as reasonably possible. Not doing so can make your business look indifferent to getting paid and slow down your cash flow for no reason. Waiting to prepare your invoices at the end of the month, for example, you may be adding as many as thirty extra days to your cash flow conversion period. QuickBooks software and Point of Sale systems make quick invoicing easy.

4. State payment terms visibly and clearly.
If you want to get paid promptly, don’t leave it up to the customer or client to decide when your invoice should be paid. Rather than giving them invoices that say vague things such as “Payable upon receipt”, make sure your invoices state specific payment terms, such as “Payable within 30 days” or “Due Date: ____________”. Your invoices should encourage prompt action on the part of your customer.

5. Reward customers for paying promptly.
Offering customers a discount for paying their invoices early, can help you get paid more quickly. For instance, if the usual policy is to have payments due in 30 days, offer a small discount such as two percent to customers who pay within 10 days.

6. Establish a follow up procedure for customers who miss payments.
Even if you’ve never had a collection problem to date, you should still have a system in place for flagging late payments, and a procedure for contacting the customer or client when the payment is late. The more quickly you follow up on a missed payment, the better your chance of getting paid.

Typically, such a procedure starts with a letter that simply states the bill is overdue and requesting the customer’s immediate attention to the matter. Nowadays there are many channels that you can use to contact the customer. Some are more effective than others. If time allows, I recommend starting out with a phone call to “touch base” with the customer or client. You want to come across as friendly and polite, not threatening in any way. Sometimes the person has just forgotten or missed seeing a bill and a quick phone call is all it takes, meaning you get paid and you don’t have to go through any of the rest of the collections procedure.

Sending collection letters via email is nice because it automatically creates a copy of the collection letter for your files, and automatically date stamps your message. However, because of email filtering and email overload, it may not be a very effective way of getting your collection letters to customers and clients. You’ll want to send them in other ways, too, such as regular mail, fax or even courier, depending upon the size and importance of the debt.

7. Turn the overdue account over to a collection agency.
Collection agencies collect debts for a fee or percentage of the total amount owed. This fee is based on how old the debts are (the fresher the better) and how much business a creditor has to offer. Expect the rate for collecting consumer accounts to be higher than for business-to-business accounts. Collection agencies have experience with, and knowledge about debt collection that you, as an individual business owner, don’t have and hiring one can be well worth it, if the amount of outstanding accounts receivable warrants it.

Proactive Policies Are the Best Way to Get Paid

As you can see, the best ways to ensure you get paid for the products you sell and the services you provide is to have proactive policies and procedures in place to cut down on the number of delinquent accounts receivable your small business has to deal with.

Things such as having credit policies in place, performing credit checks, having a partial payment policy and being clear and upfront about your payment expectations, both in person and on your invoices will go a long ways towards ensuring that you get paid, and your small business doesn’t get stuck with a lot of bad debt.

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Making Any Money? Can You Tell?

March 11th, 2013 by Doug Boswell No comments »

Profit means making more money than you spend. Many confuse profit with income. As a result, they don’t understand why all their income isn’t getting them ahead; why no one wants to invest in their high-sales company; why the bank won’t extend their line of credit.

Let’s look at the most basic way to tell if your business is actually profitable, making money, not just recording sales.

Most small business people are very good at tracking their income. Each widget sale is recorded in a spreadsheet, and each payment from a customer or client is recorded in the checkbook. Each is totaled frequently.

Actually, that’s not what you made. That’s income, not profit. It’s what’s coming in. In order to determine profit you have to subtract what is going out from what is coming in.

(PROFIT = INCOME – COSTS)

Calculating Costs
Your business has two basic types of costs; fixed and variable. Fixed costs are costs that don’t change based on your level of business activity, such as rent. Whether you produce 100 widgets per day or 150, your rent will stay the same. Variable costs are directly tied to how many units of goods you produce. If you need $10 of screws to produce 100 widgets, you will need $15 worth of screws to produce 150 widgets. The cost of screws is a variable cost.

Fixed Costs
For the most part, fixed costs can be closely estimated at the beginning of the year and accurately projected for the next 12 months. For example, you know the rent on your facility is $5,000 per month. You may know of, or expect, a rent increase in April to $5,500 per month. As a result, your fixed cost for rent will be $64,500 for the year (3 months at $5,000 plus 9 months at $5,500).

Fixed costs include things like rent, depreciation, licenses, equipment lease payments, some taxes, and indirect labor.

Variable Costs
Variable costs are those that depend on your production level. As the production volume goes up, the variable costs go up as well. If I make lamps, I have to purchase one lamp pole, two light bulb fixtures, a lamp shade and five feet of wire per lamp. If a lamp pole cost $3 and I need enough to make six lamps, my lamp pole costs will be $18. However, if I need to make 20 lamps, my lamp pole costs will be $60. I can estimate variable costs at the beginning of the year, but my estimate will not be as predictable as was my estimate of fixed costs.

Variable costs include such expenses as cost of materials used in manufacturing, certain utilities, some taxes and fees, and direct labor.

Telling the Difference Between Fixed or Variable Cost
Some costs the business incurs, such as labor will have to be split between fixed costs and variable costs. The wages you pay production labor, called direct labor, is a variable cost. It is tied to how many units you produce. Other labor costs, such as the salary you pay your administrative assistant, are fixed costs. These indirect labor costs are not tied directly to production levels. If your production increases from 100 widgets per month to 150 widgets per month it is unlikely you would hire an additional administrative assistant.

Utilities are another cost that is split between fixed and variable costs. Your phone bill, for instance, probably won’t change much as production increases or decreases. However, the demand for electrical power, and the cost of it, will increase as production lines run longer and lights stay on further into the night because of increased production.

Income
When someone pays you that is income. Income is usually related to production levels, but is not tied to it directly.

You may produce more or less than you sell. For instance, if you have 100 widgets in the warehouse when you receive an order for 150, you only have to produce 50 additional widgets. If you make widgets for skis, you may make 20 widgets every month during the summer even though you don’t sell any, just so you have enough in the warehouse when winter arrives.

So income is when you actually get paid, not when you make the product you are going to sell. Total income is just the total of all your payments received during the year.

Break-Even Analysis
The break-even point is the production level where your income for a certain number of units produced equals your fixed costs plus the variable costs for that number of units. For instance, you have fixed costs of $500, variable costs of $20 per widget, and you sell the widgets for $25 each, so your break-even point is 100 widgets.

If you reduce your fixed costs to $400, your break-even point is 80 units. Or if you cut the cost per unit from $20 to $15, your break-even point drops to only 50 widgets.

 

Profit
Any sales beyond the break-even point are profit. In the final example above (fixed cost $500, variable cost $15 each, income $25 each) your break-even point is 50 units. If you produce 50 units and sell 50 units you will break even. Your costs will equal your income. You will have a profit of $0. If you sell less than 50, you will have a loss. If you sell more than 50 you will have a profit.

For example, if you sell 70 units your fixed costs are $500 and your variable costs are $1050 ($15 x 70), so your total costs are $1,550. Your income is $1,750 ($25 x 70) and your profit is $200 ($1,750 – $1,550).

Bottom Line
To make a profit, you must be able to sell each unit for more than it cost to make it and you must be able to sell it for a price high enough to cover both the variable cost of making it and its share of the fixed costs.

This is true whether you are selling widgets, boxcars of apples, dance lessons, or hours of financial consulting.

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10 Ways to Grow Your Business

February 12th, 2013 by Doug Boswell No comments »

Is your business already as big and profitable as you want? Then read no further. For those who realize that growing your business is a never-ending necessity for its survival, as well as for your own economic well-being, this list is intended to help you focus on that task. What can you do to get your business beyond the sustenance level? All of the ways of growing a business outlined below have been successfully used by others and, with some planning and investment, they’ll work for you too.

1. Sell more to your existing market The first thing that comes to mind when thinking of growing your business is getting new customers. But the customers you already have are your best bet for increasing your sales; it’s easier and more cost-effective to get people who are already buying from you to buy more than it is to find new customers and persuade them to buy from you.

2. Know how to ask for referrals Getting new customers is the obvious approach to growing your business. One of the easiest ways to do this is to ask your current customers for referrals. But notice the verb. Doing a great job and just assuming that your customers are passing the word about your business isn’t going to do much to increase your customer base; you have to actively seek referrals. During, or after, every job or sale, ask your satisfied customer who they know who has a use for your products or services. Notice I didn’t say, “who they know who would be interesting in buying your products or services”. Don’t make your customer have to decide who wants to do business with you, just who could use what you’re selling.

3. Reduce your costs Keep in mind that the point to growing your business, is to grow your bottom line. And the difference between pre-tax and post-tax money can make this a very effective growth strategy. There are two main approaches to cost cutting; liquidating your “loser” products, and improving your inventory turnover.

4. Innovate your product or service Discovering and promoting new uses for your products or services is a great way to both get existing customers to buy more and attract new customers. Think duct tape, and how little would actually be sold if people thought it was only for ducts.

5. Extend your market reach There are several ways of growing your business by making your product or service available to a new pool of customers. The most obvious is to open stores in new locations, such as opening a store or kiosk in a new town. A new location can also be a website with an online store. Another approach is to extend your reach through advertising. Once you’ve identified a new market, you might advertise in select media that targets that market.

6. Capture a niche market Remember the analogy of the big fish in the small pond? That’s essentially how this strategy for growing your business works. The niche market is the pond; a narrowly defined group of customers. Think of them as a subset whose needs are not being met and concentrate on meeting those unmet needs. A nursery, for instance, might specialize in roses.

7. Diversify your products or services The key to successfully growing your business through diversification is similarity. You want to focus on the related needs of your already established market or on market segments with similar needs and characteristics. An artist might also sell frames and framing services, for instance. Or a mountain bike rental business might switch to renting skidoos in the winter season.

8. Participate in trade shows Trade shows can be a great way of growing your business. Because trade shows draw people who are already interested in the type of product or service you offer, they can powerfully improve your bottom line. The trick is to select the trade shows you participate in carefully, seeking the right match for your product or service.

9. Franchising The stories of entrepreneurs who have become both well-known and well-heeled due to franchising their small businesses are countless. If you have a successful business and can develop a system that ensures that others can duplicate your success, franchising may be the fast track for growing your business.

10. Exporting Expanding into international markets can also be a powerful boost to your business’s bottom line. Like franchising, this is a way of growing your business that requires quite a commitment of time and resources, but can be extremely rewarding.

Don’t let this list overwhelm you; pick one or two of these ideas that are suitable to your business and your circumstances and get your plan for growing your business underway. While you probably won’t experience growth right away, whichever way of growing your business you choose, you will see progress if you keep at it, and will successfully transform your business into all you want it to be.

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A Successful Business is a Well-Oiled Machine

January 21st, 2013 by Doug Boswell No comments »

 

Since you want more clients or customers, more income, and more time off, you’ll need to make your business run like a well-oiled machine. If you are like most entrepreneurs you’re handling almost everything yourself, and so your business is probably running YOU, instead of you running your business. That means a lot of things are being left undone, opportunities are being lost, and consequently fewer clients and are coming in.

Consistency is crucial and chaos is costly, both financially and time-wise. When things run like a well-oiled machine, when everything’s organized, chaos is reduced. Ideally, you want things run on their own, or by the efforts of someone else, so you can focus on growing your business, while having more time off to enjoy yourself. For this to happen, you’ll need to systemize the processes involved in operating your business.

If you haven’t identified the one best way to perform each repeatable task or process (such as answering the phone in a consistent manner, managing your sales process, etc.) then you’re in big trouble. You need to create some systems and procedures.

Even if you don’t have help from staff, you can still make your business run smoothly.

Begin by documenting everything you do:
Start by tracking your time. Take a note pad and document the time it takes you to do the tasks you do every day. In a week you will have a good picture of where you are spending your time. It also allows you to see what can be removed from your day, and what can be delegated to your team. By keeping an awareness of your time and where you spend it, you will be much more productive. You’ll see a pattern of where you are spending too much or too little time, and which things you are doing that aren’t essential to your business. By keeping track of this, it will help you realize how you can use your time better.

Next, you want to document the process associated with each task:
Write clear instructions on how to complete each task. This will eliminate, or at least improve, chaotic situations. Increased levels of organization will enable a better work ethic and will help keep you on task generating better production throughout the day. It can be eye opening to see what you need to put into place. Once you realize what needs to be done, and fix it, your business will run more smoothly. You may also detect areas of your business that are under, or over staffed. By recognizing this you are attacking an issue before it becomes a bigger problem. You are now also able to better delegate what you need to, so that you can focus on what is the most important use of your own time. Make certain that all task instructions include the locations of all support material so that if you are unavailable your staff can easily find what they need to keep things going smoothly.

The end result should be an instruction manual for your business:
An instruction manual, or operations manual, for your business is a huge asset. It will help you and your staff to keep on track and know where to go to find the information need. It will clearly define the rules and regulations, work ethics and processes clearly. This will help you keep your employees in line, and help employees know their proper role, and what they need to do to fulfill that role. Everyone’s job is easier when the processes and procedures are clearly stated. There won’t be any gray areas when everything is right there in black and white. As you add to your team over time, having your systems documented will allow new people to integrate better, faster and more efficiently with your current team.

Ideally you will want to define your systems and document your processes and procedures before your company grows to full capacity. Then, as you approach full capacity status, you will avoid the breakdowns that cause so many businesses to fail. At the same time, you’ll make more time for marketing and for the ability to service the resulting larger client list.

A prime reason that franchises are so successful is that the operations manual eliminates all the guesswork on how to do things. It tells you “one best way”, and documents everything in a step-by-step manner.

But remember, just because the process is documented, it does not necessarily mean it’s always going to be the “one best way” to perform that task. You should challenge your employees to improve on how things are done to increase productivity and the quality of the results. That said, your operations manual should be a living document.

There are many things in any business that can be systematized. For example, each of your different marketing methods that you use to attract new clients should be well defined and documented, as should your client management, your schedule, your calendar, your email, etc. While you’re at it, your personal life could also benefit from establishing specific procedures. You can systematize your food shopping, your doctor appointments, your personal email, your dry-cleaning, your errands, your banking. You name it, and it can probably be systematized to your benefit.

You’ll be amazed to see how much of a problem-free zone your business becomes. You will have a lot more time to focus on building the business, a lot more room for new clients, and more time to simply enjoy yourself. You’ll have more time for vacations, for self-care, and for spending quality time with friends and family. And that’s what being self-employed is really about.

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5 Tips for Cash Flow Management

December 18th, 2012 by Doug Boswell 1 comment »

Cash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your software, and ideally graphing them to get a better visualization of their impact. If the chart of accounts in your program is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. Normally, it’s the cost of your expenses that sucks up your cash and put you in an uncomfortable position.

When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures, you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are good you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

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