Do you know your business?
(Originally
published Summer 1994. V1, I2)
I know you know how to make the product or provide the
service you sell. Do you know your business from the financial end? There are certain guide lines that apply to most businesses.
See how you rate on the following points.
1. Have no more than 10% of your annual income coming from any one customer or client. It is easy to see that if you have twenty customers at, roughly, five per cent each, losing one will not
destroy your cash flow. On the other hand, five customers at, roughly, twenty
per cent each pose a serious problem if you lose one of the five.
2. Never have more than twenty-five per cent of your accounts receivable past due. This means one or more days late. Watch for changes in payment
habits of the customer. Contact the customer who is late when they first becomes
past due. If you make contact by phone, send a confirming letter. This helps eliminate any confusion on what was said or agreed upon. Send monthly statements without fail. Even if you have sent
a personal request for payment and/or have talked on the phone, send a statement. Statements
should be automatic. (See The Princely Printer article.)
3. Know what it costs to run your business. Too many people
figure the cost of their products to the penny without making any allowances for the fixed overhead. They don't want to bother with the fixed overhead because that goes away with volume. It may become a smaller percentage of the cost, but it doesn't go away.
You don't want to be like the distributor who purchased an item for a dollar and sold it for 99 cents. He said he would make up the difference with volume. If you
have good records of your expenses and you allocate them properly, you will have established a sound basis for the overhead
allocation to your product or service cost.
4. Make sure your inventory is "good" inventory. Remember
that inventory is an asset. An increase in inventory is "profit". If you have inventory that cannot be converted to a receivable, you have a problem. Buying more than you can use, can be very costly. Keep an
accurate inventory. Keep an easily accessible record of your open purchase orders. Be sure to specify delivery dates. This
insures that you will receive your orders on time.
5. Make it a practice to recheck your selling price periodically.
Unless you have an unusual business, some of your expenses are generally increasing.
Remember that no matter how low you go on price, there will always be someone who is cheaper. Don't assume that you are doing something wrong if a customer tells you your price is too high. The customer's job is to purchase items as inexpensively as possible. Think of how many times you have told suppliers that their prices were too high. Your price has to cover the cost of materials, labor, overhead and administration.
6. Assign duties to your employees AND then let them carry those duties out. Let them make the decisions that go with these duties. Remember
that the only person who makes no mistakes is the person who does nothing. Set
up checks and balances to catch any errors. The only serious mistake is the one
that gets to your customer. Most errors are caused by poor communications. Put all instructions and orders in writing.
* * * * *
The Princely Printer
(A true Experience)
This story shows the importance of sending statements
every month. I was talking to a person who had started a print shop. He was doing quite well with monthly billings of $20,000. He
did have one small problem, he knew that his pricing was profitable, but he never seemed to have enough cash to pay his bills. He did his invoicing manually. When we
analyzed his receivables, we found that he had over $60,000 past due! Because
his system was manual he had no easy way to send statements, so he didn't send them.
We took one of his people and placed his receivables on my computer. A
program was written to send statements to his customers. He was concerned because
many of the people who owed money to him were friends. The position he was told
to take was, "The statements are computer generated and automatically sent, BUT do you really owe that amount." The business continued to grow and within three months his monthly billings had increased to $40,000 while
his past due accounts had dropped to around $10,000. Many people only pay by
statement. Statements also tell your customer that you haven't forgotten that
they owe you money.
* * * *
What's the question?
Over the years I have found that the biggest problem in coming up with the
answer to a question is knowing what the question is.
Did you ever think about...
There
should be no part of your operation that you can't do
and
There
should be no part of your business about which you have no knowledge
and
If
you think you have a business, there should be no part that can't be done without you.
You should be the glue that holds the parts of your operation together.
There will always be people who want to tear your business down, don't be one of them.
