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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.

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.

Too many business owners believe that the easiest way to boost sales (and make more money) is to trim back their prices. Their theory is that a more attractive price will bring in more potential customers. The problem is that cutting sales price has too dramatic an effect on the additional volume needed to make up for that price cut.

Assume that you make $10,000 in profit from a product that costs $10. You normally sell that product for $20, and therefore need to sell 1000 units to make $10,000.

$20(sale price) – $10(cost) = $10 gross profit X 1000 units = $10,000 gross profit.

Suppose you cut the sale price by 5%, or $1.00. Now you need to sell 1,111 units to make the same $10,000 profit.

Cut prices by 10% and unit sales need to be 1,250.

Slash prices 25% (because that sounds pretty good in an ad) and you need to sell 2,000 units.

Will you really sell twice as many units of that product because the price is cut by 25%? Doubtful.

Don’t get suckered into cutting your prices to help increase sales, your business treadmill will need to spin even faster than it is now. The other problem is that sale prices tend to bring out price shoppers, or vultures, or whatever you want to call them. Don’t get me wrong, they have their place in the business world, especially if you need to unload some dated product. But don’t confuse them with loyal customers.

It’s critical that you collect money owed to you as quickly as possible for three reasons. First, the longer it takes to collect, the less likely you are to get 100% of what’s owed to you. Second, cash is king in this economy. Take a look at what the stock market is doing lately and then try to argue that cash is not a good position to have. Finally, there are several common elements that I’ve observed within long-term successful businesses and one of these is the ability to collect money faster than what is the average for that industry.

Click the image to enlarge.

Notice the average days outstanding for accounts receivable within these various industries. It varies widely from one type of business to another. The big takeaway is that you need to be better than your industry peers, regardless of what kind of business you own. Understand that this goal, strategy, or whatever you want to call it, is a very powerful way to correct all kinds of working capital problems within an organization. Here’s an example.

Suppose you own a residential electrical repair service and although sales are growing every month, you ability to collect the money is not very good. It takes you about 54 days on average to get paid. If you currently have around $100,000 in accounts receivable and you improve the average time it takes to collect from 54 days to 40 days, you would free up (or collect) $25,000. Imagine what you could do with that money! Improving the collection period to 30 days would free up $43,000.

You can’t find this diagnostic tool in QuickBooks or any other accounting software. If you’d like to have an analysis performed on your receivables, please let me know. You cannot afford to let your customers dictate your collections period.

Vendors may offer a payment term which includes a discount for early payment. The most common version of this is 2% 10, net 30. This translates into a 2% discount off the amount owed on the vendor’s invoice if paid within 10 days of the invoice date. If not paid within 10 days, payment is expected in 30 days, with no discount.

The question I’m often asked is whether or not to take the discount. My answer is always YES! Although a 2% discount sounds insignificant, it is actually a fantastic deal, because of the cost of that money. Let me explain.

Your vendor is offering to discount the bill they sent you by 2% if you pay early. You’re essentially getting a 2% bonus for paying 20 days earlier. If you extended that math out over the course of a year (365 days), it would be equivalent to a 36.5% discount. In other words, you are making 36.5% in interest on that money because you paid early. I don’t know where anyone can make 36.5% on their money nowadays.

If you’re offered a 1% 10, net 30 payment term, you should still take the discount and pay early. This is equivalent to making 18.25% on your money.

You should not borrow money, such as a line of credit, to make the payment unless you’re certain that the money will be available to pay down the line within 30 days. The vendor offering these terms should be given preferential treatment when a finite amount of money is available and you need to decide who gets paid first.

I’ll take this one step further by suggesting that you request a 2% 10, net 30 from vendors that would be willing to go along with it. I’ve recommended this to my client’s vendors with success. If that particular vendor is short on cash, they’ll probably go for the deal. Just one more reason why having cash flow in this economy lets you dictate the rules.

If you’d like a free copy of the Excel spread sheet that performs these calculations, please leave a comment, or fill out the contact form.

I’m seeing a growing trend where employers are electing to hire new employees as a 1099 contractor, rather than a more traditional W-2 employee. The two biggest benefits for the employer are lower payroll costs, and more flexibility. Since there isn’t always a defined amount of work offered to the new hire (e.g. part time, full time), the employer looks upon that new person as a flexible resource, rather than a more rigid obligation. The biggest downside to the worker is that they generally don’t get any benefits.  If an employee is classified as a 1099 subcontractor, the employer doesn’t have to pay state or federal unemployment, workers compensation insurance, or federal taxes.

The concern I have is over the proper definition and ultimate taxation of those wages. The Labor Department is now signing agreements with almost 12 states to share information about improperly labeled workers, in order to crack down on businesses that cheat workers. This shared information between the state and feds will expose the business to multiple fines.

I’ve sat in on a few IRS audits regarding employment tax evasion and I can assure you that there is no wiggle room here, with interest and penalties on back taxes going as high as 25% per year.

By definition, a 1099 subcontractor must meet the following criteria: they cannot work all of their available hours for one employer, which means they need to have other contracted engagements. They need to carry their own insurance. A W-9 form must be on file with the employer. And preferably, a business card should be attached to that W-9 form. The idea is that this contracted employee should look and feel like they are holding themselves out as an independent worker. Go here for the most recent IRS publication: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html