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If you can’t manage the flow of cash in your business, your business is out of control. Control the cash flow and you’ll control your business. I hear new clients talk about not having enough money to make payroll, that’s a cash flow management problem. That’s different from profit. Many businesses have shut down, even though they had a profit on paper, because they had poor cash flow.

It doesn’t matter how big your company is, or how fast your profit (or sales) are growing. If the money isn’t there when you need it, you’re history. So the first step is to understand that profit, as represented on your Profit & Loss statement is a static number. Think of it as a sort of history lesson. By examining your P&L, you will only understand where you’ve been. Cash flow on the other hand, is dynamic, ever changing and always on the move. If profit is like reading the newspaper, cash flow is like watching a movie.

Your P&L tells you how much money you’re spending and receiving and where you’re doing that. Cash flow tells you the same thing, and also when you’re spending and receiving it, or can expect to spend and receive it. That’s the key difference. Forecasting when this flow in and out of your business happens, or will happen, is what a cash flow statement does. A successful business is great at forecasting and also at efficiently managing the flow in and out.

Here’s an example of inefficient, or poor flow management: your customer owes you money on net 15 terms. On day 25, the money hasn’t arrived, on day 30 you send out a statement, on day 45 half the money comes in, on day 60 you send out another statement, and so on.

Managing for profit requires that you pay attention to your pricing strategy, gross margin and overhead expenses. Managing for great cash flow is an attention to the details of timing. Knowing where and when your money is flowing it crucial to beginning to understand how to control the flow.

After a hectic couple weeks of travel, while working with clients to close out their 2011 accounting records, and begin financial strategies for 2012, I was struck with one big takeaway theme. From all of these meetings I’ve attended, there has been a common decision (or resignation) by almost every client to raise prices and improve gross margins.

There may be several reasons, but I have a hunch that it will boil down to two. When the fourth quarter results are all in, I’ll know for sure and will keep you posted. The first reason is that my clients have been on a steady path to improve product offerings in an effort to increase gross margin; otherwise known as innovation. The four basis steps they follow are:

1. Innovate – to identify better ice cream, faster delivery times, more effective backup systems
2. Smoother the client and prospective client base with service
3. Inch up prices
4. Repeat

This is a simple process, but will usually involve some gut-wrenching decisions and risk taking. On client had to kill a type of health care program designed for teenagers. It was a logical extension of his successful program for adults. After investing countless hours preparing and marketing, it never panned out and he walked away from the significant investment, to spend his time more productively on newer ideas.

The second reason our clients are willing to raise prices and improve gross margin is more subjective. I believe that after weathering three years of a recession, most of the competition that was habitually discounting prices to stay alive, is now gone. A recession has a way of shaking out weak players. What’s left are generally solid businesses that have more latitude to raise prices.

What’s been your take on the last fiscal quarter? Are you more or less optimistic that you were a year ago?

IRS agents are starting to request accounting backup files from small business accounting software such as QuickBooks and Peachtree. The obvious concern is how much information the IRS is requesting and how it is using that information.

Since 2010, the IRS has been training revenue agents to be proficient in using QuickBooks, Peachtree and other similar accounting software packages. These agents are encouraged to request electronic files from small business taxpayers and their accountants.

There have been court challenges to these kinds of requests and exactly what kind of audit that would require an electronic backup file is still being sorted out. For instance, questioning a handful of business expenses probably would not warrant a request for your QuickBooks files, but larger-scope audits may trigger this kind of request.

There is a concern that corrections and adjustments within the accounting records, no matter how legitimate, may lead the IRS agent to question the integrity of the books in question. Sloppy bookkeeping that must later be corrected by an accountant could draw this sort of red flag.

On Friday I met with an accounting client who manages a medical clinic. Among other things, we’ve been working on improving the rate of collections from their customers. A previous manager had really let the billings, and overall attention to A/R, get out of control.

I’ve always said that if you have clients that owe you money at the end of any given month, one of the simplest things you can do to improve the speed and success of collecting your money is to send out a statement. This particular client was doing that, but since it had never been done before, many of their customers were ignoring the notices.

She started putting these orange stickers on every monthly statement that was over 60 days, and the money has been flowing in ever since. Since we also take care of the accounting, I can attest to the improved cash flow. It’s been a remarkable change in the past couple of months.

If you want to improve your cash flow, you should consider using a variation of this orange sticker, or perhaps the red stamp below. It’s easy, it get’s the attention of your customers, and it works.

If you’ve tried anything similar, I’d love to hear about it.

If I asked you what the most important, most productive, most vital asset was in your business, what would it be? I suppose a landscaper might say his pickup truck, an accountant would suggest their computer; a call-center might say their employees.

I would suggest that with any business, the most important (and most overlooked) asset is the business itself.

Technically a business isn’t an asset, because any CPA will tell you that in accounting terms, it’s the equity on a balance sheet. I get that, but my point is that most of the business owners I work with are thinking about the day-to-day operations, cash-flow, profitability, etc. They rarely talk about how to improve the value of their business. It doesn’t happen automatically. It does require a strategy and conscious effort.

Some day you’ll want to stop working, close the doors and move on. It would be a shame to simple cease operations and go home, without cashing in on the value of your business. But in order to do this, you’ve got to build something of value. There is always a ready market of investors that are interested in buying a business, as long as it has sufficient cash flow to pay back their investment.

The beauty of improving the value of your business is that by doing so, you’ll also be improving the profitability and cash flow. It’s kind of like getting a house ready to sell, by making some modest improvements before you put it on the market, you’ll increase the value and appearance of the house and ultimately the selling price.

Consider what you think your business is worth and contact me if you need help improving the value.

At least six variables, from within an organization and from external forces, will create uncertainty in mind of a small business owner, as a selling price is established on a service or product. The most difficult to grasp is that of perishable opportunities.

When you think of perishable products, you’re probably thinking of the literal translation, such as bread, meat and fruit. It becomes less clear when it’s not the product that perishes, but the opportunity. Think about a weekly magazine issue. The actual magazine doesn’t perish, but the opportunity to sell it at full retail price, after one week, does. Fashion is another example. What sold at full price this past Christmas will probably be hard to move on a discount rack in 6-9 months.

If you want to remove uncertainty and maximize your business revenue, you need to get very good at forecasting when a product (or service) needs to be discounted because of declining value (read: consumer interest).
The opportunity to maximize revenue can be found on the top and bottom end of any service or product. If warmed over, out of date product is clogging your store shelves, whether its fashion, books, or nursery stock, it’s occupying space that could otherwise be selling something more interesting and more in demand. On the back end, moving yesterdays hot item at a marginal discount, before it dies, get’s tattered, and otherwise looses even more value lets you clear out inventory without resorting to a maximum discount.

In professional service firms, instead of a store shelf or warehouse getting clogged up, its time that becomes so finite. A good CPA can command a better hourly rate during the peak of tax season, than she can in the dead of summer. Likewise with an IT company selling a fantastic new backup system, completion will eventually catch up, but in the mean time, the bleeding edge of technology is worth full price.

It’s your job to understand what the value cycle of each product is, and how to maximize it.

Think of revenue management as a simple way to increase profits and cash flow, without implementing an across the board price increase, and without taking on additional overhead expenses. What you are doing is optimizing your selling prices in relation to your product or service ability. Here’s a quick example to illustrate my point.

Suppose you own a barbershop. When creating a budget, you sat down with your accountant and figured out that $15.00 was an appropriate price to charge, based on your overhead expense and profit goals. The busiest day for customers at your shop is Saturday, and the slowest day is Wednesday. You’re so busy on Saturdays that you often turn away customers. It’s quite likely that many of your Saturday customers or potential customers can only get their hair cut on a Saturday because they’re too busy the rest of the week.

Revenue management principles will suggest that you raise your prices on Saturday, and offer a discount on Wednesdays. Because your available time is finite, you will be making more money on Saturday with higher paying customers, and also making more money on Wednesday because you will have moved customers with a more flexible schedule to your slowest day, thus having a full schedule all week.

The key is figuring out the math (prices) in relation to the supply and demand of your customers. In this example:

In a very complex way, airlines apply revenue management principles with their Saber computer system. Every seat on every flight has a constantly changing sales price, depending on minute by minute changes in demand and supply.

The biggest challenge for a small business owner is to stop thinking about your selling price based on cost. The focus should be on price in relation to supply/demand. Your selling strategy should center on parsing out many micro-markets. Give up on trying to appeal to mass-markets with a “one size fits all” approach.

Finally, realize that each product or service you offer has a value cycle. What might be the hottest pair of shoes or coolest computer app in today’s market will need to be discounted in the future. You will need to continually reevaluate your revenue opportunities.

Have you applied revenue management to your small business? Please comment, I’d love to know about it.

Right now is an excellent time to switch payroll service providers. We’ve found that new clients begin working with Ashgrove payroll for a few reasons:

1. They are tired of getting notices from the state or feds
2. They want to save money – we generally cut the payroll service fee bill by 30-50% from other providers such as Paychex, ADP, Prime Pay, etc.
3. They want to be able to pick up the phone and get an answer right away.
4. Automatic download into QuickBooks, Peachtree and other major accounting software packages for free.

Besides having piece of mind with the payroll function in your small business, we add value to this by offering excellent time keeping systems, analysis of labor costs, and advice on pay rates based on job functions and responsibility.

Contact us today to learn how you can have peace of mind in 2012 with your payroll. You’ll never have to worry about it again.

I’ve run into several clients’ QuickBooks data files that have been out of date. It’s important to install the latest releases (updates) because previous software malfunctions are corrected, and suggested improvements are added. You can tell which release your QuickBooks software is using by pressing the F2 key.

Here’s a guide for the latest release, according the QuickBooks version:

QuickBooks 2012 Pro, Premier, Enterprise               Release 1 (R1)

Due out on store shelves any day now. Here’s what’s new in QuickBooks 2012.

QuickBooks 2011 Pro, Premier, Enterprise               Release 8 (R8)

QuickBooks will no longer unexpectedly close or display the error “QuickBooks has stopped working” when creating or editing memorized transactions.

QuickBooks 2010 Pro, Premier, Enterprise               Release 13 (R13)

Tax line assignments have been improved when sending data to Turbo Tax, help menu was improved, and direct deposit messaging will now include which vendor check is incorrect.

QuickBooks 2009 Pro, Premier, Enterprise               Release 13 (R13)

Certain reports can now be opened in Microsoft Word, Intuit Sync Manager has been updated, there is a build in password reset, help topics have been updated, employer’s telephone number in now on the pay stub.

There are two ways to update QuickBooks. Open the help menu and click “Update QuickBooks”, or if your software is more than two releases out of date, go directly to the Intuit QuickBooks update website and download the Manual Update, then install it directly into the software. This tends to be a little more reliable and faster. I’ve linked each Release number directly to the QuickBooks update website.

I’ve worked with too many business owners that are reluctant to raise prices on the products or services they sell, mostly out of fear that they’ll lose customers. What you may not realize is just how many customers you’d have to lose, before any impact is felt on profitability.

My last blog post illustrated the (somewhat) devastating effect that price cutting will have on business profitability. Now let me discuss the brilliant impact raising prices will have on your gross profit.

Using the same example in my previous post on pricing, there are 1000 units being sold for $20 each, with a cost of $10 each.

SELL: $20 X 1000 units = $20,000    COST: $10 X 1000units = $10,000  ($20,000-10,000 = 50% profit)

If you raise your selling price by just 5% (or $1.00), you would increase gross profit by $1000. Your gross profit margin was 50%, and would now bump up to 52%. Furthermore, you would have to lose more than 9% of your product sales before you would begin to lose gross margin profit.

9% = 90 units, which lowers the sales from $21,000 to $19,110, after cost of product is backed out, your gross profit is again $10,000. This gets a little technical, but bear with me…..

Raise your selling price by 20% and your gross profit would leap to 58% (this is huge folks). You would have to lose more than 28% of your sales (or customers) before the impact would be felt on profit.

My point is that most loyal customers will not stop using your service or purchasing your product because prices went up 5%, perhaps not even 20%, but the effect to your profitability is significant. Just stop and consider this for a moment, especially when you compare it to my point in the price cutting blog post, about how many more units you’ll need to sell to make up for the reduced price. It is not a 1 to 1 relationship. Notice below, how quickly the units needed to sell outpaces the units you can afford to lose (sales on), based on the same percentage of price cut or price increase.

Click the picture to expand the size.

Cut prices by 5% and you need to sell 111 more units. Raise prices by 5% and you can afford to lose the sale of 90 units.

Close you QuickBooks file, and stop examining your accounting records. The mystery shouldn’t be in whether to raise or lower prices. The challenge is to figure out how to raise prices, without affecting or alienating your customer base. And yes, this pricing theory applies to retailers as well as professional service firms. It doesn’t matter if your selling a potted flower, or billing out at $110 per hour.

Have you raised prices in the past three months? If so, let me know about it and how your customers reacted in the comments section.