Profit from loyal customer 5 ways

Never confuse a loyal customer with a satisfied one. A satisfied customer can be fickle in their motivation and desire, while a loyal customer will be your strongest advocate. A satisfied customer will leave your business for a better deal at your competitor, or when you make a mistake. A loyal customer will forgive mistakes and will be more effective than the best marketing campaign you could design.

There are five ways you will profit handsomely from a loyal customer. Watch your accounting balance sheet become stronger every month when your focus in on loyalty.

  1. Base profit – That is, from every product or service you sell. With a good bookkeeping system, you should know how you compare to your industry peers.
  2. Increase frequency of purchases – Loyal customers will buy more from you over time. Do you know what your average sales per customer are each month?
  3. Reduced costs – A loyal customer doesn’t need their hand held when they enter your business; they already get how you operate.
  4. Referrals – Probably the hardest thing to account for, but also the most powerful. Loyal customers will tell their friends and family how delighted you’ve made them.
  5. Price Premium – Loyal customers won’t shop around and appreciate the value proposition you’ve designed into your product/service. Because of that, you can (and should) charge a premium for it.

Now just compare this with the idea of offering a coupon, Groupon, or other discount. It becomes completely unnecessary.

There is a simple measure you need to use, to determine just how many of your customers are loyal. If you’d like a copy, please send me an email and I’ll forward a copy of the survey question(s).

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Accounting for 2 reasons why Groupon is bad for business

There are actually four reasons why discount programs are a lousy way to attract loyal customers. Examples of discount programs include things like frequent flyer miles, coffee punch cards, and yes, Groupon. They’re all marketed under the guise of being a customer loyalty program, but the reality is that they usually breed a group of fickle customers that will flee to another provider, as soon as a better deal is offered. Of the four reasons these discount (loyalty) programs don’t work, Groupon happens to qualify in two of those categories.

  1. Watered-down effect: If you’ve ever tried cashing in frequent flyer miles, you know what I mean. According to Webflyer, there continues to be a widening gap between the number of miles awarded by airlines, and the number of miles redeemed (down to 7.5%).
  2. Lack of incentive: Too many programs are designed to make it impossible to see any benefit whatsoever, in the short term.
  3. Economic Trap: Groupon falls into this category. According to a study done by Rice University, about half the businesses participating in daily deal programs like Groupon, lose money. Which begs the question, why bother? Is sudden exposure to new customers worth losing money over?
  4. Your not learning anything about your new customer: Ok, granted this isn’t unique to Groupon, but I was reminded of this problem when I redeemed Groupon deal at our local steakhouse. When I quizzed the owner on how he was measuring the redemption rate, average ticket price of meals, or return rate of new customers, he just shrugged his shoulders.

If you want to understand the five ways truly loyal customers will increase your profits, check back soon for my next blog post.

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Accounting reports won’t tell you this about your business

Despite everything you’ve been taught in business school, or the school of hard knocks about business success, there is one thing that all customers will pick up on and keep them coming back for more. That is, complete and unbridled enthusiasm for whatever it is you do. I’m not talking about simply liking what you do. Rather, the product or service consumes you and everyone around you. Two quick examples:

Some friends and I went out for dinner one Friday night in Wisconsin, and ended up at a tiny country tavern. The owner was a second generation butcher and was well known for his sausages. As we waited for our meals, he came around with slices of different bratwurst he recently made, explaining the different ingredients. He was absolutely giddy about the whole process. Small business, probably an accounting nightmare, but Tom, the owner of Schwai’s Meat was completely enthusiastic, and I’m still writing about the experience 10 years later. By the way, he now owns three locations!

Second example: I sat in on a lecture about wildflower prairie restoration. The owner of the business, Neil Diboll, owner of Prairie Nursery talked about his earlier, somewhat leaner years when, for entertainment he would spend evenings sitting out in the middle of a prairie trying to pet bumble bees (apparently they become quite docile when the day cools off). Nuts? Yes! But today Neil owns what is arguably the largest purveyor of wildflower and prairie grass seeds in North America.

You have to love what you do first, the money will follow, which is a distant second. Heck, even if the money never follows, I think you’d have a richer life doing what you love to do, rather than what seems like a good business opportunity.

This post has very little to do with QuickBooks, accounting or bookkeeping; I understand that. But it has everything to do with entrepreneurial success. Ask yourself one simple question, what do you spend most of your time working on? Do you enjoy every minute of it?

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Ignore this accounting measure at your own peril

Yesterday I wrote about the importance of financial discipline, when it comes to your debt to equity ratio, using IBM as the example. It occurred to me this morning that as I examine accounting records of my business clients, both in and out of QuickBooks, there is another accounting measure that almost always needs improvement, and goes hand in hand with debt to equity. That is, your current ratio.

Current ratio is an accounting measure that compares your current assets to your current liabilities. Put simply, it’s a comparison of your bank account balances, added to your accounts receivable, along with the value of your inventory, compared to how much you owe in credit card debt, payroll taxes, bills to vendors and your line of credit. Ideally you should have two dollars of assets to one dollar of liability, which would be expressed as a current ratio of 2.

This measure is very important, considering the uncertainty of the economy, for two reasons. First, banks are scrutinizing this accounting ratio. I had lunch with a loan officer from a Raleigh bank a few months ago, and asked him what his loan committee considers important when deciding for or against a business loan request. He told me that applicants need to have a running history of current assets, above their industry peers. Your ability to “live within your means” in terms of money you owe to others (accounts payable), while having a healthy balance in your checking or savings account, is what’s being judged.

The second reason you need to improve upon your current ratio is precisely because of the economy we’re in. It’s like the old adage says, “whoever has the gold, makes the rules”. Before I even examine a QuickBooks file of a new client, I can usually tell by their level of confidence that they’ve got money in the bank. Almost everything is on sale in this economy and if you have money, you can move your business forward on the cheap.

If you have a negative current ratio (owe more money than you have in assets), or if the ratio is less than one to one, you should consider the simple savings advice I wrote about a couple of weeks ago, HERE. There are few things that will build your confidence more than accounting for a solid current ratio. If you managed to improve upon this, comment below and tell me how you did it.

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Accounting discipline leads to business longevity

The cover story in the business section of USA Today is about how IBM has managed to survive and thrive as an ongoing business entity for 100 years; a rare feat indeed. Two attributes jump out of this story. The first is constant product and service innovation, something I’ve discussed in my new video series. The other is the fact that they’ve remained financial conservative. If you’ve read my blog for any length of time, you’d realize that this is another accounting tenet I embrace.

So what does it mean to be fiscally conservative? Well for starters, you should not take on excessive debt, in good time or bad. In IBM’s case, they carry about 95 cents of long term debt for every $1 invested by the shareholders. Put into small business terms, you would hold a dollar of long term debt, for every dollar of equity. Check out your balance sheet and tell me what it reveals.

If you’re like many small business owners I help manage accounting and business finances for, you’ll probably have a 3 to 1 ratio of debt to equity. In several cases I see negative equity. Although these kinds of businesses are ongoing, they are technically insolvent. Sort of like living in your house even though you’re upside down with your mortgage. Interestingly enough, banks have historically ignored this fact, until recently. Now, the equity section of your balance sheet has come under great scrutiny, with good reason. Think about it, you could take out a long term loan for $5000, then pull out $3000 as a shareholder distribution (i.e. to pay yourself), causing a distortion of this accounting measure.

If your debt to equity measure is less conservative than you’d like, how do you correct it? Two ways: either inject more of your own money into the business, or take less of the profit out. How do you take less profit out? Give me a call.

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QuickBooks used to correctly recognize a sale

When working with small business clients that use QuickBooks software, I often see a short cut used that really needs to stop. That is, the habit of bypassing the method of creating an invoice, receiving a payment, then depositing the payment(s). Too often I find bookkeepers or accountants copying the deposits from the bank statement, directly into QuickBooks, thereby calling it income.

There are two big problems with this. First, one of the benefits of doing your own accounting and bookkeeping on your computer (as opposed to having an accountant do it for you), is that you can create and monitor several different types of income accounts. For instance, a home builder should separate income based on new construction, remodeling, and commercial construction. A nightclub should separate income based on food, drinks, cover charge, etc.

You begin with an invoice. If you don’t have a customer that you would normally invoice in the traditional sense, common in retail businesses, then you should replicate the “Z” reading on the point of sale system each day. A simple template can be created to recognize each line item. The various payments types received should zero out the invoice total, by receiving these payments against the outstanding balance. The key here is the invoice items. They are what direct the income amounts to the appropriate income accounts, when creating the invoice.

The deposit should represent exactly what was taken to the bank. If credit cards are automatically deposited, they should represent their own deposit. Everything needs to match the bank statement exactly. Bookkeeping is about details, and these are the details that make your accounting accurate.

Which leads me to my next point; bookkeepers have often been accused of embezzling money. Similarly, banks and credit card companies can and do make mistakes. If you only create deposits in QuickBooks to match the bank statement, you’re make a big leap of faith that all income earned is what actually got deposited. Big mistake!

I don’t care if you use QuickBooks Online, QuickBooks Pro or Premier, or the Macintosh version of QuickBooks; you need to appreciate the importance of entering sales correctly. The goal to setting up a bookkeeping system in QuickBooks, to recognize your sales, is to use memorized transactions, templates, and other tactics which are part of this accounting software.

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5 Levers that will increase profit

When you think about it, there are five key financial levers that will increase profits in an organization.

  1. Lead generation – How many different sources are you tapping into?
  2. Conversion Rate – Most small business owners grossly over estimate how many qualified lead they turn into an actual sale. Start keeping track of this and the whole system will get more honest.
  3. Number of Transactions – How many times are you selling to the same customer? What is your share of their wallet?
  4. Average dollar sale – in retail is called average basket size or average transaction. This may be the easiest metric to improve on. Is easy to sell more to an existing customer if they trust you.
  5. Margins – Raising prices is the easiest way to make money, though I admit, not always possible. But if you think about it, when you raise your price, and if all costs and overhead expense remain the same, that additional money will fall to your bottom line.

Improving more than one (ideally all five), has an incredible multiplier effect. It starts with an accurate set of accounting records. You should also track this in Excel, or even on paper, just don’t trust your gut. If you want to use my Excel template, send me an email and I’ll forward you a copy.

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Do what you do best (to survive)

The latest unemployment figures which indicate unemployment edging higher, is further evidence of my belief that we are headed for a double-dip recession. Heck if anything, we are not continuing down a path to recovery.

I’ve advised clients for years that they should farm out all employee payroll that is not directly tied to their core competency. For example, if you own a child care business, then your bookkeeping, meal preparation, facility cleaning and website design should be farmed out. My reason goes beyond the common belief that you should do what you do best, and leave the rest to the experts in that field.

Because the economy is so uncertain, small business owners need to be as flexible as possible. As Jim Collins put it, you get the right people on the bus (core competency) to start with. If you can do that, and if you’re not tied down with administrative overhead, you can drive and operate just about anywhere, doing anything.

I have many examples of small business accounting tasks we’ve taken over that used to be part of an employee’s job. In every case, we improved the bookkeeping process, produced more accurate results sooner, and saved the business owner lots of money. In one case, we took a 40 hour per week bookkeeping job in Raleigh and trimmed it back to 17 hours per week!

More to the point, I’ve seen too many instances where a big client dries up and the small business can’t react fast enough. While they’re pondering their options to replace the lost work, the overhead expense engine keeps running. It’s much easier to cut back work you’ve handed over to a subcontracted service, than it is to cut hours on an employee who’s depending on a steady paycheck.

Consider turning your employees into a variable cost, tied to the work at hand, rather than an overhead expense line item. If you’ve gone down this road, has it worked for you? Please let me know in the comments section.

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Accounting tactic used to reach your savings goal

A small business owner in Raleigh, North Carolina told me that one of his business goals was to have $20,000 in savings before the end of 2011. Based on our accounting records and the cash flow of his business, this is reasonable.

What’s been difficult is having the discipline to actually put money aside. The bills in his company’s accounts payable, the loan payments, and the payroll every other week seem to always eat up available cash flow.

I resolved this with a very simple tactic that I’ve used for many other small business bookkeeping clients. For every deposit that goes to the bank, we siphon off a small percentage (1-5%) and put it into savings. The percentage we choose is a function of how much they can reasonably save, without it being a detriment to the business, divided by the cash-basis sales for the year. The other key is to turn off the option that allows the business savings account to act as overdraft protection for the checking account. Preventing overdrafts requires another kind of discipline.

Try this idea, it really works! In fact, if you have other ideas for how to save money, please put them in the comments section.

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What’s keeping you from small business success?

You’re paranoid (competitors, employees, partner will steal your ideas) – a commercial banker told me he sees this more often than you’d think.

You’re waiting; for the economy to improve, the idea to develop fully, the approval of others.

You can’t trust your feedback loop; accounting or other KPI’s are giving you mixed signals.

You’re afraid; of failure, of embarrassing yourself, of commitment.

Groupthink; your employees, spouse, partner, or banker all think every idea you have is great.

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