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
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.