Entrepid

If you’re jumping in midstream, the series begins in Part 1 with the complete list. Part 2 can be found here.

3) Set the standard up front and be firm

It’s human nature to try to get away with whatever we can. Those of you who are raising, or have raised, young children know this from experience. You’re being naïve if you think everyone leaves the child behind when they get older.

If you want your customers to pay you on-time, every time, you have to deliver a consistent message: “We’ve kept up our end of the bargain and so should you.”

And when I say consistent, I mean 100%. Like the child attempting to wear down the parent with a never-ending series of Can I’s, your customers will constantly test you to see if you’re serious. Let them slide 5 or 10 days this time and next time it will be 10 or 15 days. Before you know it, the customer with 30-day terms is paying you in 60 days. Do this with enough customers and your Accounts Receivable get out of hand.

I’m convinced that lack of firmness on A/R terms comes from a place of weakness. We’re afraid that somehow what we provide to our customers isn’t quite good enough. And if we push them on payment, they’ll go somewhere else. While this may be the case in a small minority of situations, I doubt that your customers decided to do business with you because they thought they wouldn’t have to pay you on time. Operate under the assumption that they buy from you because of price, or customer service, or quality, or anything other than you’re an easy mark. Your wallet, and your blood pressure, will thank you.

4) Use late charges and enforce them

Remember that I said in Item #1 that Accounts Receivable is your money. You’re just letting the customer hold it for awhile. If they hold it for longer than you’ve agreed to, it’s only appropriate that they pay you for the privilege.

Assessing late charges accomplishes two goals. It not only incentivizes your customers to pay you on time, but it also compensates you in case they don’t. You should make sure of the legalities in your jurisdiction, but I recommend at least 1.5% per month, or part of a month, that payments are late.

This is another case where sticking to your guns is important. Make your policy that a payment has to be received, not mailed, by the due date. And, in case a check doesn’t clear act as if you never received it in the first place.

I had a chat with a client the other day and he laid out his thoughts concerning the levels of employees in an organization. He was attempting to evaluate the value of continuing the relationship with his business partner.

I thought his observations were very insightful and my readers might learn something from him. Thanks, BC!

You show up on time and do what you’re told

It may sound harsh, but not necessarily inaccurate to say Level 1 employees are those people without skills, but fill a need anyway. They may have a future after learning the skills necessary for the job, or maybe the job doesn’t require skills.

The minimum performance measure is to show up on time, every time, and do what the supervisor says to do.

These people don’t have a lot of long-term value unless they climb up to the next level. If your work requires only Level 1 employees, be prepared for lots of turnover.

You can do your “craft”

Level 2 employees are sufficiently skilled in their craft to be able to work with minimal close supervision. You should be able to give a Level 2 employee a simple goal and expect them to complete the task, or series of tasks, without having to direct each step in the process.

You can supervise Level 1’s and Level 2’s

Level 3 employees have enough knowledge of the tasks that 1’s and 2’s are responsible for to direct and supervise their activities. Level 3’s don’t need to be as skilled in the actual performance of the tasks, but they need to know enough not to be fooled when an employee says “that can’t be done” or “there’s not enough time.”

You can manage a project

Level 4 employees can see the big picture enough to be able to manage resources (people, material, time, money, etc.) toward the completion of a project with minimal assistance from higher-ups.

These employees are experienced in their occupations, have a measure of business savvy and are capable of managing and motivating employees. They are also extremely valuable to your organization.

You can manage an enterprise

A Level 5 is generally the owner (although not all owners reach this level) or a trusted senior leader in the business. They can see the whole picture and are capable of developing and implementing strategy, deploying capital, recruiting and managing Level 4’s and creating the culture of the organization.

Ideally, if you’re going to pick a business partner it should be a Level 5 person. However, they are few and far between and may not be available to a small business or startup company. Level 4, project manager, is the lowest level I’d recommend for a business partner. The difficulty arises when neither/none of the business owners are Level 5’s. In that case it’s vitally important that the business owners engage with outside advisors or mentors who can help them with managing the enterprise.

After some serious thinking, my client arrived at the conclusion that his partner was no higher than a Level 2. A very skilled Level 2, but not valuable as a partner and leader of the organization. He decided to end the partnership.

Jeffrey Pfeffer in Business 2.0 writes in favor of deadlines:

So although setting a deadline may help rivals plot strategy, it can also get allies to act, create a sense of urgency when you need it most, and possibly even convince opponents that you’re serious. That’s why astute managers use deadlines to get things done.

My experience is that deadlines, especially self-imposed ones, are the key to keeping on track in managing your business. The problems arise when you have 25 things on your To Do List, all with vaguely defined wish-to-get-done-by dates, and none of them seem to get completed.

As promised in Part 1, the series continues with an in-depth look at each of the 15 Things You Can Do To Get Paid Faster. In this post, we’ll look at the first two items on the list.

1) Make a commitment

You didn’t get into business to do drudgery like manage your accounts receivable. You want to do the fun, cool things and watch the checks roll in. But the sad fact is that a lot of your customers are not going to send payment when they’re supposed to. You have to give them a reason, and often that reason is you’re on top of things and they know it. This really is a case of the squeaky wheel getting the grease. Or, more appropriately, the squeaky palm getting greased.

Once you provide your service or ship your product the revenue is now your money, and you’re just letting the customer hold it for a little while. Every day they are late, or heaven forbid, they don’t pay at all, takes money out of your pocket.

Think of it this way, if your company has a net income before tax of 10% of sales, just 5% of accounts receivable becoming uncollectible cuts your profit in half. Effective management of your A/R not only gets the money into your checkbook faster, but cuts down on the number of accounts that turn into bad debt.

If there is one common theme among companies I see with collection problems it’s that the owner didn’t make a commitment up front to manage A/R and got into cash flow trouble because of it. Better to avoid trouble in advance then try to extricate yourself later.

2) Provide value in the relationship

If you have accounts receivable, you probably have accounts payable as well. Think about the vendors you always pay on time, even if you have to sacrifice something else. Then think about the vendors you put aside for another day. What’s different about them?

The vendors you pay on time, every time, are the ones you can’t do without. It’s that key supplier without whose product you don’t have sales. It’s the utility or telephone company – if they cut you off you’re out of business.

Or what about your most important “supplier” of all: your employees? Try not paying them on time and see what happens.

A discussion on methods of providing value to customers is the subject for another day. For now, just know that being that critical supplier to your customers makes your job of collecting accounts receivable so much easier.

I’ll be writing a series of posts on how to speed up your Accounts Receivable collections. For those of you who can’t wait, here’s the full list of 15 with one bonus.

1.) Make a commitment – keeping on top of your collections isn’t fun, but it is necessary.

2.) Provide value in the relationship – be the vendor or service provider the customer can’t live without and won’t want to damage the relationship with.

3.) Set the standard up front and be firm – your customers will respect you if you hold firm to your payment standards. The ones who get paid on time are the ones who insist on getting paid on time.

4.) Use late charges and enforce them – part of setting standards and being firm.

5.) Invoice quicker – invoice as soon as your work is done.

6.) Send invoices electronically – save a couple of days’ mail time.

7.) Invoice more often – no law says you can only invoice at the end of the month.

8.) Get up-front deposits – the ultimate in quick collection.

9.) Develop a working relationship with the client’s A/P person – if they like you and respect you, you will go to the front of the line.

10.) Call in a couple of days to see if they got your invoice – eliminates the “Gee, we didn’t get your invoice. Can you send a copy?”

11.) Call in advance of the due date – to head off problems before the account is overdue.

12.) Accept payment electronically – this not only gets the money into your account quicker, but eliminates “The check is in the mail.”

13.) Send thank-you’s – especially near the start of a new relationship to acknowledge quick payment.

14.) Deposit checks right away – sets the tone for how important prompt payment is to you.

15.) Make collection calls as soon as accounts are late – if you’ve already called to head off problems, there should be no reason for late payment.

Bonus

16.) Cut off chronic late payers – a pattern of late payment indicates possible financial problems with a customer. Don’t be the one left holding the bag when they declare bankruptcy.

Here are the posts discussing these 16 items in more detail:

Part 2, Part 3, Part 4, Part 5, Part 6, Part 7 (and final)

I had a conversation the other day with a client in which he was lamenting his difficulty in securing supply. This client takes a partially manufactured item and processes it into a completed specialty item for sale.

Making the partially completed part takes millions of dollars in equipment and the industry is dominated by large ($100+ million ) organizations. The specialty business my client is in consists of small companies with annual revenues between $500,000 and $1,500,000. Since the large suppliers are going after mass markets, supply for the specialty items has been problematic since the beginning of time.

My client has done a better job than his competition at securing supply, but he still spends a great deal of his time on the effort. As we were talking, it hit me that THIS is his competitive advantage. Doing the difficult thing – the thing nobody else can do.

It made me think that just about every business has something difficult, something that can be marketed and delivered, that can separate them from the competition.

The software company that spends the time to make the interface intuitive.

The landscaper who sweeps up the clippings instead of spreading them around with a blower.

The appliance repairman who shows up at a specific time, not within a 4-hour window.

The blogger who posts something worthwhile every day. (I’m not above preaching to myself.)

What difficult thing can you do to distinguish your company in the marketplace?

The folks over at FreelanceSwitch have a slick Freelance Hourly Rate Calculator. I say slick, because it’s a nice piece of software, but I think it gets the order of things backwards.

It’s actually pretty common for small businesses (and consultants and freelancers) to attempt a cost-plus approach to setting prices. It’s easy to add up all your costs, put in a profit percentage, and voila!, you have the price you want to charge. Unfortunately, the real world doesn’t always co-operate.

The price you can charge your customers is limited on the upside by “value” and competition.

Value is a slippery concept, but even if your customer doesn’t have a firm number in mind, they do have some notion of what your product, service or time is worth. Whether or not this is enough to cover your costs is of no concern to them.

Think of it this way: if a prospective client approached me to do several months’ worth of backlogged bank reconciliations and I quoted them a rate of $175 an hour, I doubt very much they’d engage me. Bank reconciliations don’t have a “value” of $175 an hour.

Which brings up the second price limitation: competition. The prospective client could certainly find someone else to do bank reconciliations at a much lower hourly rate – maybe $20 or $25 an hour. Even if they’re not as efficient at bank recs as I am, their total cost will still be much lower.

So, your price is limited by both the value of the product or service AND by your competition – you get the lower of the two.

But, maybe your value is very high and you either don’t have much competition or they charge high prices. Why would you want to limit your income to some cost + profit level when you could possibly charge more?

I can see two bad results from using the cost-plus approach. Either you price yourself out of the market and don’t get enough business, or you underprice yourself and leave money on the table. Neither one is a good result.

That doesn’t mean I think the calculator is a bad thing. It’s a useful tool to see if the prices you plan on charging are enough to cover your expenses. If not, you need to rethink your business.

Hat Tip: Lifehack.org

New articles for the May edition of SCFO Monthly are posted. You might find either OODA Loops Don’t Get Soggy In Milk or Somtimes You Have To Fire A Customer of interest.

Every month I’ll write two or three articles of interest to small business owners and the people who advise them. If you’d like to receive the newsletter via email, here is the link to sign up.

Rob at Business Pundit has an interview with Laurence Haughton, co-author of It’s Not The Big That Eat The Small…It’s The Fast That Eat The Slow.

You should read the whole interview, but here’s a taste:

Speed just keeps gaining momentum (as a competitive advantage). Why? Because:

1. Slow costs more. Every minute we can take out of manufacturing time, stocking time, get-to-market time, and customer response time saves us money and makes us money.

2. Speed is the ultimate customer turn on. Everyone is short of time. We hate delays, long lines, out-of-stocks. We love finding what we want and getting back to work (or play) fast. And we’ll pay for speed.

3. Speed is the one advantage that the big competition can’t duplicate easily. Big companies are bureaucratic, dysfunctional, and self-absorbed. They don’t listen, they are slow to change, and they kill momentum and initiative. Don’t copy them.

Rob also has a link to a free webinar that Haughton will be giving on speed as a competitive advantage.

Lagging Indicators are those pieces of data that tell us what happened. They’re history.

The most common collection of lagging indicators that business owners are familiar with are the financial statements – Balance Sheet, Income Statement and Cash Flow Statement – along with the other management and financial reports pouring forth from the accounting department.

If you’re like a lot of companies I come across that are transitioning from small business to small enterprise, you get your financial statements for the previous year in April July. So not only are your indicators history, they’re ancient history. That’s a tough way to manage a business. Read the rest of this entry »