Small Business Cash Flow: Strategies for Making Your Business a Financial Success

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ffirs.qxd 10/31/06 2:26 PM Page iii

SMALL BUSINESS

CASH FLOW Strategies for Making Your Business a Financial Success

DENISE O’BERRY

John Wiley & Sons, Inc.

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SMALL BUSINESS

CASH FLOW

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SMALL BUSINESS

CASH FLOW Strategies for Making Your Business a Financial Success

DENISE O’BERRY

John Wiley & Sons, Inc.

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Copyright © 2007 by Denise O’Berry. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Designations used by companies to distinguish their products are often claimed by trademarks. In all instances where the author or publisher is aware of a claim, the product names appear in Initial Capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data O’Berry, Denise, 1955– Small business cash flow : strategies for making your business a financial success / Denise O’Berry. p. cm. ISBN-13: 978-0-470-04097-3 (pbk.) ISBN-10: 0-470-04097-1 (pbk.) 1. Small business—Finance. 2. Cash flow. I. Title. HG4027.7.024 2006 658.15'244—dc22 2006011036 Printed in the United States of America. 10

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Contents About the Author

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Preface

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CHAPTER

CHAPTER CHAPTER CHAPTER CHAPTER

CHAPTER

1 2 3 4 5

Understanding Cash Flow—Your Number-One Priority

1

Your Business Partner—The Accountant

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How Money Works in Your Business

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Finding and Keeping Cash in Your Business

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Record Keeping Isn’t Drudge Work; It’s Priceless History

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6 Charging the Best Price to Keep Your Business Healthy

CHAPTER

7 Using Your Hidden Cash Resources to Grow Your Business

CHAPTER CHAPTER

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8 Marketing—Your Cash Generator 9 Resources

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Recommended Reading

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Web Sites to Visit

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Index

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About the Author A small business owner since 1996, Denise O’Berry understands the challenges facing small business. She’s lived them and has helped countless clients work through the same issues. She understands the frustrations, the fears, and the joys of owning a small business. With more than two decades of operational and management experience, O’Berry has developed a sharp eye for how businesses get bloated with inefficiencies, cross-purposes, and miscommunication—and how they can retool for a sleeker, smoother, more strategically focused organization. An entrepreneur who quickly built her own successful consulting business, she helps other small business owners set priorities, take action to grow their business, and create the balance they want between life and work.

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Preface Most small business owners hang out their shingles without having a clue about what’s required to be successful on the money side of their business. They see a bunch of numbers on a sheet of paper and groan about how they wish they’d paid more attention to math in school. But cash flow in a small business is about much more than math. It tells the story of your business and can be adjusted by simple actions you can take to move your business from failure to success. In the United States we don’t raise business owners, we raise employees. So it’s no wonder many small business owners who have a passion for their business have no idea how to make it financially viable with a healthy cash flow. But somehow you’re making do. There are millions of you in business. Most of you have fewer than 20 employees. A good portion of you have only one or two employees or manage to go it alone. But you’re facing the same frustrating business issues every single day. You spend most of your day working and have little to show for it. You own a business that is dependent on your presence and you can forget about taking a day off when you’re sick or want to have a little fun. You feel overwhelmed with the financial aspects of your business and don’t understand why you’re always broke even though you’re making a profit. Don’t despair, help is on the way. In this book, you will learn: • How to select the right accountant and get the maximum return from that partnership. • How to get money from the right places to position your business for success. • The simple strategy for keeping money moving in and out of your business.

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• Why having a budget and keeping good records can mean success or failure. • How to charge just the right price so customers keep coming back (and bring their friends and neighbors, too!) • How to squeeze the most out of every business relationship, marketing campaign, lost sale, and business process to maximize the cash available. I’ve met hundreds of you over the years. And I’m proud to be counted as part of the small business movement in this country. But we have to work a bit smarter if we’re going to survive. I hear countless cries time and again from small business owners who are struggling to survive. When I dig a bit deeper, the solution lies in action. We’ve become an instant answer society. We want a quick fix for everything without doing anything. That’s not going to happen in your business. It’s going to take some work to get it on the right track. You have to be willing to commit the time necessary to do that. Just about anyone can give you tools to fix your problems. This book is your tool. I’m hoping that it becomes a dog-eared copy lying within your reach on a daily basis until you get on the right track. Although I can’t force you to take action, absolutely nothing different will happen until you do. When I conducted a survey of more than 200 small business owners, they told me what they wanted to learn about how to manage cash flow. The overarching theme of their comments was “help me smooth out the humps in my cash flow.” There is no fast and easy way to do that. It takes consistent action in every aspect of the business to make it work. So I focused on the tasks you need to undertake to help you be successful. Chapter 1, “Understanding Cash Flow—Your Number-One Priority,” provides a brief overview of the whys behind business cash flow problems. It’s really very simple and describes those things you must understand and what you must look at to begin correcting your cash flow issues.

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Chapter 2, “Your Business Partner—The Accountant,” delves into selecting an accountant for your business. I was surprised when about half of the small business owners who took the survey said they had no accountant. An accountant as the financial expert and partner for a business owner is worth their weight in gold. They can help you take the right actions to grow your business and prevent you from making missteps along the way. But it’s important to take the time to choose correctly. Wasting time with the wrong accountant doesn’t help you a bit. I give you a road map for making just the right choice. Once you’ve got the right partner on your team, you need to know a little about what they’ll be sharing with you and how to use financial reports to understand what happens to the money in your business. In Chapter 3, “How Money Works in Your Business,” you learn about the most important financial statements and key accounting terms that are critical for your business. It’s easy to overlook places where cash could be hiding in your business. In Chapter 4, “Finding and Keeping Cash in Your Business,” I reveal all the nooks and crannies you can explore to see if you’re missing something. When you’ve found all the cash you can inside your business and are still on the short end of the cash flow stick, looking outside is your best option. You’ll learn about different types of financing available too. Having a cash flow budget will be a critical key to your success as you move forward. It will help you decide what projects to take on, when you need to slow down cash outflows, and how to make adjustments to the way you do business. Chapter 5, “Record Keeping Isn’t Drudge Work; It’s Priceless History,” may just become your favorite part of this book. Once you’ve learned how budgeting can be such a useful business resource, you’ll wonder how you ever lived without one. Have you struggled with pricing your products or services? Most small business owners do. Plenty of them severely undercharge, too. In Chapter 6, “Charging the Best Price to Keep Your Business Healthy,” you learn what goes into setting a price for what you offer in your business

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and how to make your customers love paying you. It also helps you take a longer look at your customers and what opportunities you have for their lifetime of doing business with you. Chapter 7, “Using Your Hidden Cash Resources to Grow Your Business,” gets into the meat of your business. Sometimes you have to radically change what you do and how you do it to make things work. Process and procedure adjustments can make a big impact. So can having a strategy to make your customers loyal to your business no matter what prices you charge. Marketing is the lifeblood of your small business. It’s what makes the cash pour in. But it’s not a one-time activity. Using different strategies and tactics to cast the widest net will pay the biggest return for you. In Chapter 8, “Marketing—Your Cash Generator,” you learn about the various strategies for making the most of your marketing dollars.

OPEN YOUR MIND One major thing I ask of you as you read this book is to open your mind. As you progress, you’ll be reading about a fitness trainer or a restaurant owner or some other type of business owner and may think, Well, that doesn’t apply to me. Although specific examples are used throughout the book, each of them could apply across any industry in any business. Think bigger.

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CASH FLOW

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A small business owner is working 80 hours a week and he just discovered he doesn’t have enough money in the bank to pay this month’s bills. That’s a story repeated time and again in small businesses around the United States every single day. Small business owners like you work your fingers to the bone, negotiate the best deals for a huge profit, and have no cash to show for it. It’s not ignorance; it’s just a misunderstanding of the simple steps that must be taken to ensure your business is the success you visualized. You may be making big profits on the products or services you sell, but that doesn’t mean you’re in good shape. It’s a good thing to have profit in your business, but most important is having cash. Profits don’t equal cash. At any given time your profits can be tied up in inventory or accounts receivable and could be completely inaccessible to you. What really counts in your business is having cash on hand so you can take advantage of opportunities to expand your business and deal with emergencies as they arise.

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UNDERSTANDING CASH FLOW—YOUR NUMBER-ONE PRIORITY

It’s essential that you understand how cash flow works in your business so you don’t end up sending it in the wrong direction. The basics of cash flow include a few simple items. Cash coming into your business is called revenue, income, or sales. These all mean the same thing. Cash going out of your business is called expenses. These are the bills you have to pay to operate your business like your rent and telephone. You probably already know that income minus expenses equals profit, but what you may not be aware of is that you can’t count on that profit to run your business. Assets are the things that your business owns. You probably have a computer. That would be considered an asset. Any invoices you’ve issued but have not received payment for are also assets. Your company also has liabilities. These are bills that you owe to someone else; money you owe on any credit cards, bank loans, or outstanding bills. Assets minus liabilities equals equity. This is what your business actually owns. If you financed that computer and have paid 50 percent of the bill, you own half of the computer. So how do you get a handle on what shape your business is in from a cash flow perspective? For starters, you need a good record keeping system. There are plenty of options for accounting software available to small businesses, but that’s not a requirement. If you’re more comfortable keeping your records manually, that’s fine, too. In your record keeping system, what’s important is knowing how much money people owe you, how much money you owe, and your cash on hand balance. You also need to know the rolled up totals of your income and expenses for each month and year. Financial tracking and reporting is not a once a year event aligned with the ritual of doing your taxes. Businesses that are successful know their financial position and track it on a regular basis. Businesses that aren’t successful don’t. Without fail this has held true in my experience working with small business owners over the years. You simply must know where your business is from a financial perspective.


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What’s the Problem?

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If you’re having cash flow problems, they more than likely stem from one of four key areas.

1. 2. 3. 4.

Your sales aren’t high enough. You’re not collecting money people owe you. You’re not charging enough to cover expenses. You’re spending too much money running your business.

Any of those look familiar? Sometimes cash flow problems in a small business can be attributed to just one of those items. More often, it’s a combination. One thing’s for sure. If you don’t step back and take a look at each of these items, you’ll never know where the problems lie.

WHAT’S THE PROBLEM? You need to take a systematic approach to each one to find the problem and take action to correct it.

Your Sales Aren’t High Enough The best way to get more sales is to get more customers or sell more to the customers you currently have. The only way to do that is by using a consistent marketing strategy that targets the right people for your product or service. You absolutely must have a marketing strategy for your business and a tracking system that tells you what’s working and what’s not. There are numerous ways to market your business and increase your sales. How you do that depends on your business services and the customer you are targeting.


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UNDERSTANDING CASH FLOW—YOUR NUMBER-ONE PRIORITY

You’re Not Collecting What People Owe You It’s really easy to get so caught up in the work of your business that you forget to bill for your services or forget to track what you’re owed. But the simple truth is you must. Your survival depends on it. If you do work and don’t get paid, what have you gained? Nothing except a bunch of lost hours. You don’t have time for that. You simply must have systems in place for making sure you get what is due to you.

You’re Not Charging Enough to Cover Expenses One thing a small business cannot do is compete on price. Just ask all those small business owners who tried to compete on price with WalMart. You don’t have the same buying power as the giants. What you do have is the capability to appeal to a different segment of the market by making sure you offer extra value for the price they pay. That way you can calculate your price to make sure each and every expense is covered with some left over for your good work.

You’re Spending Too Much Money Running Your Business Running your business isn’t all about paying bills. How your business operates contributes in a big way to what you end up with as your bottom line. Whether you have employees or outsource some of your work to contractors, how that work gets done can make the difference between profit and loss. How and when you spend your money has a big impact, too. You can’t afford to spend haphazardly, not knowing from one day to the next how it will impact your bottom line. You may be flush with cash one month and not have enough the next. Knowing in advance when that will happen will enable your success.


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It’s All About Action

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IT’S ALL ABOUT ACTION Knowledge alone won’t change your business. Action will. You may be able to correct your direction and restart your business on the right course. But my suggestion is don’t go it alone. There’s plenty of help available for small business owners in the form of experts and information to improve your cash flow. The main thing you have to do is get started. You’ve taken the first step by purchasing this book. Now all you have to do is put the ideas into action. Let’s do it, shall we?


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The life of a small business owner can be a lonely one. Juggling a million things at once to keep your business on a successful track is no easy feat. Add making sure the government is happy and you could end up with a bunch of sleepless nights. So why spend them alone? An accountant can be your best business advocate and your connection to sanity in a world of craziness. But you must select your accountant wisely. A mismatch can be your worst nightmare. I’m a perfect example. During my first three years in business, I blazed through three different accountants. What a waste of time and money. I don’t even remember how I found the first one though it was probably through the suggestion of a business colleague. I realized after about three months it wasn’t the right fit for me and started looking around. I thought I did it right the second time. All was well until that accountant decided to sell out to someone else and never bothered to tell her clients. The person who took over was a very clear mismatch. After that a little legwork proved prudent and my current accountant

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YOUR BUSINESS PARTNER—THE ACCOUNTANT

has been with my company for about seven years. If you spend some time going through the process outlined in this chapter, you can avoid the headaches I encountered. The good news is that technology provides you with plenty of options for finding and working with an accountant. But that’s the bad news, too. There are so many choices; it can be tough to narrow them down. Services can range from completely virtual to totally hands-on. Suzette Flemming of Flemming Business Services Inc. says 90 percent of her clients are 800 or more miles away from her physical location, yet she can enter and process all of their paperwork, monitor accounts for red flags, and provide weekly and monthly reports. For many clients, she will download data directly from online accounts. All without ever meeting them face-to-face. Having this kind of business arrangement with your accountant requires a high level of trust and comfort with today’s available technology. However, that’s not a good arrangement for Stephanie Chandler, owner of Book Lovers Café, who likes to keep a little closer tabs on her financial matters even though she hates dealing with the paper. Chandler maintains a spreadsheet so she can keep an eye on daily sales. She has an onsite bookkeeper and a local accounting firm that takes care of the other details. Once a month she gets financial reports so she can be informed about what’s going on. Your choice of business arrangement may be similar to these examples or somewhere in between. Let’s figure it out.

SEARCHING FOR YOUR ACCOUNTANT What Do You Want? Since you’ve decided it’s time to hire an accountant, that decision will be the easiest part of your selection process. This is one choice you don’t want to make by picking a name from the biggest ad in the yellow


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Searching for Your Accountant

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pages. So where do you start? With yourself. You can’t hire an accountant until you know what you’re looking for. That means you need to take the time to think through your requirements before you make the first call. Take a few minutes to answer the following questions before you proceed. You will find this Requirements Worksheet in Chapter 9. Requirements Worksheet. Answer each question with a simple yes or no.

1. I’m comfortable having a business discussion via e-mail. 2. I’d rather have business discussions on the phone. 3. I’m more comfortable if I can be face-to-face with someone during 4. 5. 6. 7. 8. 9. 10. 11. 12.

a business discussion. I’m on top of my tax situation and fully aware of my obligations. I’d rather not learn the ins and outs of the tax code; someone else can do that for me. I hate organizing the financial papers that come with owning a business. I get a lot of satisfaction from sorting through monthly receipts and tracking how they impact my business. I prefer working with a large firm. I’d rather do business with a small specialized firm. I could benefit from having a partner who can connect me to other business opportunities. I like to bounce business growth ideas off an expert. I’m willing to dedicate cash resources to get the results I need.

Let’s take a look at what you said to help you decide where to start looking for an accountant and what type of firm you’ll select. Geographical Proximity. If you answered questions 1 and 2 with a yes, that means you are open to the possibility of having an accountant who may not be in the same city as you. Your comfort level with tech-


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nology as a communication tool can be an asset you will put to work for you once you’ve made your selection. If you simply must have your discussions face-to-face, you’ll need to limit your search to your local area. Service Level. A yes answer to question 4 indicates you may not need to hire a full-time accountant as long as you’re willing to use your time for tax issues. You may be comfortable with someone who provides minimal direction and support of the activities you complete. On the other hand, if just thinking about all the reporting requirements and tax regulations makes you sick to your stomach, you’ll need to consider someone who can take on those responsibilities for you. Paper Handling. Some people just love taking all the invoices, sales, and expense receipts and making sense of them. But most people don’t. A yes to question 6 means you will need to seek out an accountant who can complete those details for you. Business Size. There are a variety of accounting firms, from small independents to huge companies with hundreds of employees. If you often feel lost in the crowd when working with large firms, then your best choice would be a small or mid-sized company. Although larger firms have a wider breadth of knowledge, it’s tough to establish a personal relationship with the people in the firm who may be handling your account. Sheer turnover can cause you frustration and wasted time and effort. A smaller firm is typically more connected to their clients on a personal basis and can provide specialized consulting and advice. Service Fees. Typical fees for accounting services range from $75 an hour at the low end to more than $300 an hour at the high end. Paying more doesn’t necessarily equate to better service or better advice. Some accountants work strictly on an hourly basis and others prefer a retainer. Think about your cost tolerance by checking your budget before you start interviewing.


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Digging Deeper to Find the Right Fit

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Knowing what your requirements are will help you narrow down the next step of your search so you end up with just the right person. Find Out Who’s Available Let’s begin with whom you know. Call your networking contacts and talk about whom they use and why they use them. Make sure you find out what they’re paying in addition to customer service quality. You can use the Accountant Data Sheet in Chapter 9 to keep track of what you find out. The next best place to find potential candidates is membership organizations. Do you belong to a chamber of commerce or professional group? Scour through the membership directory. And don’t forget your cyber network. Put a call out to your favorite discussion list or online business forum. By now you should have at least five names. It’s time to act on all the information you’ve collected. Review what you’ve discovered. You may have limited information on some, but that’s okay; it will work out in the next step. Look over each candidate’s data sheet and compare it to your requirements. Eliminate any names that just don’t seem to fit.

DIGGING DEEPER TO FIND THE RIGHT FIT It’s interview time. Plan on setting aside at least 30 minutes for each interview. Your interviews should be conducted in a face-to-face meeting unless you’ve chosen to consider an accountant who is not close to your business. Even if the accountant is local, you may choose phone interviews just to save yourself time. But be careful doing that. You’re going to be working with this person for quite some time on very confidential issues about your business. A face-to-face meeting can help you clarify how easy this person will be to work with.


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Remember as you conduct your interview to stay on topic. Don’t talk about tax issues. You are interviewing and trying to find out what type of fit this person will be for your business, not trying to solve problems. “When can you start?” is the only question most potential clients ask Caroline Jordan of The Jordan Result LLC. That’s a big mistake. She’d rather answer questions that dig into her experience. “Asking me what I did for a business like yours is a great question. You should also ask what results I achieved and how I’m different from all the other accountants available out there.” Your prospective accountant wants you to dig deeper, too. All set? Add what you find out to the Accountant Data Sheet you have for each accountant you interview. Here’s what you need to ask. Your Interview Checklist Do You Specialize in Businesses Like Mine? Although this question may seem unimportant, it’s really one of the most critical. Retail has different requirements from service or manufacturing. Businesses that sell to the government have special commitments. Rules and regulations can be many or few. You want someone who is an expert on the tax issues that impact your business. If they’ve never worked with a business like yours, it could end up costing you more money in the long run. What Have You Done for Others? If all this accountant has done is provide reports and complete tax returns, that may be less than what you are looking for. Make sure they describe business results that are comparable to those you may be seeking. This is a good time to get three references to call. How Will I Be Charged? Let them give you a rundown of what they offer and the corresponding fees for the services. Do they offer a bun-


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dled package? Is everything a la carte? How does it compare to your requirements? Spend some time talking about exactly what you are looking for and what the exact cost will be. Discuss ways to minimize your cost if possible. What’s It Feel Like? Does this person seem to be genuinely interested in your business and working with you? Will you feel comfortable questioning them and asking for advice as your business grows? Do they listen? Remember you will be spending a good bit of time communicating back and forth. The relationship is a very important part of this business agreement. What Is Your Education and Experience? How many years has the accountant been doing what they do? How do they stay up-to-date on current tax rules and regulations? Are they a general accountant or certified public accountant (CPA)? Unless your business has certain requirements like regular audits or complicated loan applications, a general accountant should work fine for you. The key here is to make sure their knowledge isn’t antiquated and that they are continually learning. The last thing you need is an expert who’s working from a playbook that’s 20 years old. You’re Almost Done Time to pick your best choice. You probably already know whom you want to select since you’ve come this far. But give yourself some time to look over the information you’ve collected to see if you’ve missed anything. Make sure you contact the references each accountant gave you. Another few days’ wait won’t hurt a thing. Once you’ve made your final decision, get on the phone and congratulate the firm you’ve chosen and schedule your first meeting to confirm your working arrangement.


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WORKING WITH YOUR ACCOUNTANT Will you be sending your accountant a box of papers every month or something a little more organized? How often will you meet? What reports will you receive and when will you receive them? What do you have to supply and when, to get the information you need at the right time? To ensure he has his finger on the pulse of his clients’ businesses, Bob Glasgow, CPA of Strombeck Consulting, Inc., requires that each of his clients meet with him four times a year; this is mandatory, no excuses. Each meeting takes about four hours and covers a variety of topics from financial reports to coaching staff. In between those meetings, his clients are free to call him at any time. Whatever your agreement is with your accountant, getting your company set up correctly will be the key to a clear day-to-day financial picture you can work from to make the cash flow properly. Your First Meeting During your first meeting, you and your accountant should review how you are currently tracking your financial performance and make adjustments as needed. Then discuss expectations on both sides of this working agreement. Depending on the depth of the work to be provided, your accountant will expect certain documents from you by a deadline. Set up a schedule for each item. Make a commitment to meet the deadlines. Accounting is a very date driven activity, and you probably aren’t the only client of this firm. Delay on your part could mean a big delay on theirs. Discuss the current state of your business and your growth plans. Share new ideas you have planned for your company and get an opinion about the best course of action. Talk about what cash flow issues concern you and the best way to smooth out the bumps. Make sure you look at the big picture, too. What will your business look like in five


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years? Your accountant can assist by helping you create a strategic plan from the story your financial numbers tell about your business. Take some time prior to your meeting to collect your thoughts about your current business state and where you want your business to grow, by answering the following questions. You will also find this on the Business State of Affairs Worksheet in Chapter 9. What Did You Accomplish This Year That You’re Most Proud Of? List those business actions that have made you feel good about the way your business is going. What Was Your Most Difficult Experience This Year? Did you stumble over defining a target market for a new product or service? Did sales fall in a particular area? Did you end up with a flop with a special promotion? What Was Your Biggest Discovery? Think of this in terms of an Aha! Did you accidentally find a new market for your product or service? Roll out a marketing strategy that worked really well? Make a new connection that helped grow your business? What Would You Like Your Biggest Accomplishment to Be at the End of This Year? Looking forward is one of the toughest things for small business owners to do. You spend a lot of time taking care of dayto-day activities and problems from yesterday’s issues. Yet it’s important to think ahead and define what you really want so you can plan for it. Where Would You Like Your Business to Be in Terms of Sales, Size, Number of Employees and Location(s) (1) at the end of next year? (2) in two years? More looking forward. Doing some soul searching to figure out just what the future looks like will help you determine what actions you need to take now to get there.


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Who Are Your Top Five Competitors and Why? Knowing who your competitors are and why they are your competitors will help you set prices and differentiate your business. What Aren’t Your Competitors Doing That Customers Need? Defining what needs of customers in your industry are not being met can help you in forming new product and service offerings. What Trends Do You See in the Market That Could Make Your Products and Services Obsolete? Knowing how the trends in the marketplace impact your business can help you take action to proactively address issues before your business takes a financial hit. What Are Your Competitors Doing to Push Themselves Ahead of the Pack? Watching your competitors can give you clues about what your business should be doing to increase sales and ultimately your business bottom line. What Is Your Typical Day Like from Start to Finish? What Would You Like to Change About It? What activities are you spending your time on? How many hours each day are you spending on your business? Can some of your tasks be outsourced or delegated to an employee? Would you like to decrease/increase the number of hours you are spending? Once you’ve answered each of these questions, take some time to put your thoughts into an organized one-sheet format so you can have a logical discussion with your accountant about your current and future business state. Include your general goals, time commitment, financial goals, target market, and a service goal. A small business owner who painted wall murals wanted to move into a more targeted market. She used the Business State of Affairs Worksheet to collect her thoughts and ideas about what she wanted her business to be. Once it was complete, she organized her thoughts into one sheet to help guide her discussion with her accountant.


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Goals • • • •

Increase and cultivate market. Adjust pricing to ensure a profit. Organize the business side. Work a plan to achieve goals.

Time Commitment • Work 28–30 hours per week. • Twenty hours per week will be dedicated to fulfilling client commitments. • Ten hours per week will be used to market business and perform administrative business activities. Financial Goal • $50,000 gross sales—requires $4,166 per month in sales activity/ $1,041.50 per week/$350 per day/$50 per hour. Target Market • Stay at home mothers 34–52 and working women 36–50 with children between the ages of 0 and 18 living in a home that is valued at $250,000 or more. Service Goal • To create a kids’ dream room from top to bottom including all accessories and furniture. Targeted groups of children: 0–5 newborn/toddlers; 6–12 tweens; 13–18 teens. Staying in Touch with Your Accountant Set up a schedule to meet on a regular basis and discuss how your business is moving along. A monthly meeting schedule is a good way to get started. This meeting can be used to discuss your financial reports and track the progress of your strategic plan.


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You can now rest assured that the survival of your business—from a financial record perspective—is in good hands. And you made that happen.

AN ALTERNATIVE SOLUTION You may want to consider hiring a bookkeeper to do the day-to-day financial tasks for your business. Today’s bookkeepers are part accountant, part tax whiz, and part financial analyst according to the American Institute of Professional Bookkeepers (AIPB). The old stereotype that bookkeepers are reclusive people who shuffle papers all day in a dark corner of a business are gone. They are professionals who can handle most of the financial transactions for your business. Bookkeepers’ fees are typically one-half to one-third of accountants’ fees, so if you’re looking to trim costs, a bookkeeper may be your alternative. They won’t completely replace the need for an accountant but can handle the day-to-day responsibilities. An accountant could then review their work on an occasional basis and perform the more complicated tasks such as tax returns, saving you a lot of money. You should take the same approach to hiring a bookkeeper as you did with your accountant.

USING ACCOUNTING TOOLS Several tools are on the market to help you keep track of your financial records. You can choose to track manually using the plain old paper and pencil method, structured templates offered in spreadsheet programs, or software specifically focused on keeping track of your business financials.


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Using Accounting Tools

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The key to your tracking program is to get it set up properly in the beginning no matter what method you use. You must have a good foundation to build on. Software tools are definitely the biggest time savers once you get over the learning curve of using them. QuickBooks software by Intuit is easy to use and one of the most popular programs for small business owners according to my survey. The software is offered both as a computer program you can purchase for a one-time fee and via an online Internet interface. Peachtree by Sage Software SB, Inc. is another small business accounting program that you may want to consider. This software is offered for use on your computer and doesn’t currently have an online version. MYOB accounting software offered by Acclivity LLC is another option if you are looking for a desktop software product you can use on your computer. Your choice of product will depend entirely upon your business needs. Your best bet for selection is to work with your accountant and look at the product features that will provide you with the financial statements you need.


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CHAPTER

3

s How Money Works in Your Business


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Those monthly reports your accountant provides aren’t just a bunch of numbers on a piece of paper. They tell a story about your business. That means it’s important for you to take the time to understand what they mean, not just give them a cursory glance and then file them in a drawer. They explain the financial history of your business, which can be used to improve future results. The fact that reports are based on historical data is important to remember when you are focused on the cash flow in your business. Although a cash flow statement will tell you how much money you have on hand right now, it won’t tell you how much you’ll need in a month or three months from now. You need a cash flow budget to see the reality of your cash. You’ll find out how to create and use a cash flow budget in Chapter 5, but for now let’s focus on understanding what your accounting reports are telling you about your business. On your accounting reports, positive numbers are stated as the actual number and negative numbers are shown either preceded by a minus sign or enclosed in parentheses.

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HOW MONEY WORKS IN YOUR BUSINESS

Table 3.1 Tracking Sheet Month

Deposits

Withdrawals

July August September October November December

$25,434.21 16,979.51 20,548.64 20,006.82 28,001.36 20,134.99

$23,820.41 19,503.48 21,330.90 19,876.55 26,804.47 22,100.37

Balance $1,613.80 (2,523.97) (782.26) 130.27 1,196.89 (1,965.38)

A small restaurant owner knew his business had cash flow problems but didn’t know quite how to go about fixing them. He had an accountant who did his annual taxes whom he met with once a year. He kept all the paperwork for his business in a file—one file for sales and one file for bills. He did not keep any kind of monthly statements to track the financial status of his company. But from looking at the bank balance every month, he knew his business was in trouble. He kept track of his business cash balance by tracking deposits and withdrawals from his bank account. You can see an example of this in Table 3.1. What an awful mistake to use bank statements to track business financials. But you knew that, didn’t you? This was his idea of cash flow tracking. What’s wrong with it? Well, for one thing, it’s based on what’s already happened and gives him no idea of what expenses he has or whom his primary customers are. If he had proper financial statements, he could use that information to see exactly in what months his business would encounter a cash shortfall.

KNOW HOW YOUR ACCOUNTING SYSTEM IS SET UP It’s important to note how your company has its accounting system set up. It will be set up using the cash or accrual method. If you are using


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Standard Accounting Reports

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the cash method, enter a sale on your accounting system when the sale is paid. Enter an expense, such as rent, on your accounting system when it is paid. Conversely, with an accrual method, sales are entered when the sale is made. The payment for the sale may not be received for weeks or months, but the sale is recorded in your books. Same thing with your expenses. You may receive your rent bill on the fifteenth but not pay it until the first. Enter it in your accounting system on the fifteenth. If you’re not sure how your accounting system is set up, check with your accountant. It’s important.

STANDARD ACCOUNTING REPORTS Whether you are using the cash or accrual method of accounting, the reports you will use to track your financials are the same. These are called statements. The three standard financial statements you need to understand are the income statement, balance sheet, and cash flow statement.

Income Statement Your company’s income statement (Table 3.2), also known as profit and loss (P&L), shows the income and expenses of your business over a period of time. Income is money coming into your accounts in your business and provides totals for an at a glance look at what’s going on. Income statements are pretty basic. You take income minus expenses and get net income. Net income is what’s left over after the bills are all paid. But net income doesn’t equal cash in the bank. Don’t forget that. The income statement shows activities on your account, not cash that has been deposited or withdrawn from the bank.


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Table 3.2

Income Statement (Profit and Loss)

Income Consulting income Project fees Reimbursed expenses

$ 8,000.00 74,997.11 3,787.73

Total Income Expense Advertising Office supplies Bank service charges Dues and subscriptions Insurance Interest expense Licenses and permits Payroll expenses Officer salary Payroll tax expense Total payroll expenses Taxes Subcontract labor Telephone Travel Total Expense Net Income

$86,784.84

$

845.91 9,466.71 471.47 1,896.19 438.00 492.43 162.50

31,000.00 2,493.86 $33,493.86 136.76 $11,137.50 3,864.12 6,419.79 $68,332.81 $18,452.03

Balance Sheet Your balance sheet (Table 3.3) lists your assets, liabilities, and equity in the business. It’s like the big picture view of what’s going on in your business. It’s called a balance sheet because it shows a balanced view of your company. The key formula for the balance sheet is assets equal liabilities plus equity. Your company specifics may be different depending on how your accountant set up your system. There are three types of assets captured on the balance sheet.


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Standard Accounting Reports Table 3.3 Balance Sheet Assets Current Assets Checking/Savings Savings account Checking account Total checking/savings

$41,029.26 3,544.57 $44,573.83

Other current assets Other current asset Total other current assets Total Current Assets Fixed Assets Equipment Accumulated depreciation Equipment—Other Total Equipment Total Fixed Assets

993.80 993.80 $45,567.63

–9,051.42 10,660.82 $ 1,609.40 $ 1,609.40

Other Assets Organizational costs Accumulated amortization Organizational costs—Other Total organizational costs Total Other Assets

–198.24 496.37 $

298.13

$

298.13

Total Assets

$47,475.16

Liabilities and Equity Liabilities Current liabilities Credit cards MasterCard account

69.95

Total credit cards Total current liabilities

69.95 $

69.95 (Continued)


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Table 3.3 (Continued) Long-term liabilities President/CEO Vice President/COO

10,000.00 10,000.00

Total long-term liabilities

20,000.00

Total Liabilities Equity Additional paid-in capital Capital stock Retained earnings Total Equity Total Liabilities and Equity

$20,069.95

443.88 1,000.00 25,961.33 $27,405.21 $47,475.16

Current assets are items that can easily be turned into cash. In addition to the money you have in your bank account, current assets also include any item that is a cash equivalent such as accounts receivable or inventory items. Fixed assets include tangible items you use in your business, like your computer, to produce income for your company. Last, intangible (other) assets are included in the asset list. These are things like your web site domain, trademarks, business methods, and copyrights. Notice how the assets are listed on the balance sheet as most liquid to least liquid. The most liquid items can be converted to cash easily and the least liquid cannot. This is the end of one side of the balance sheet. The other side of the balance sheet includes liabilities and equity. Liabilities are obligations owed by the company. Current liabilities include accounts payable and other short-term debts like taxes. Current liabilities are always paid with current assets, so it’s important to have enough assets to take care of the liabilities. A general rule of thumb is to have two and a half times more assets than liabilities. Long-term lia-


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Standard Accounting Reports

bilities are those obligations that will be paid in a term longer than one year. Equity, also known as net worth, is determined by subtracting liabilities from assets. That amount is the equity of the company. Cash Flow Statement The cash flow statement (Table 3.4) is a report on the cash your business has available right now and shows the flow (in and out) of money in your business. It’s a snapshot in time of the cash available from your business minus any receivables or payables. There are three sections to the cash flow statement. Operating activities are those that make money for the business. Financing activities are those that raise money for the business. A third section, Investing Activities, though not shown in this table, shows how a company is leveraging its future growth by investing its cash in assets for the business.

Table 3.4 Cash Flow Statement Operating Activities Net income Adjustments to reconcile net income to net cash provided by operations Accounts payable Credit card payments Payroll liabilities Net cash provided by operating activities

$15,279.00

–1,986.34 –1,954.10 –112.00 $11,226.56

Financing Activities Retained earnings

$ 1,626.13

Net cash provided by financing activities Net cash increase for period Cash at beginning of period Cash at end of period

$ 1,626.13 $12,852.69 7,048.83 $19,901.52


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ACCOUNTING TERMS YOU NEED TO KNOW There are hundreds of accounting terms, but you don’t need to know all of them. Other than the terms you’ve learned from the financial statements, there are a few more you should be familiar with. Invoice An invoice is a bill you generate when you sell your product or service to a customer on credit. The invoice is typically sent to the customer at the time of sale or directly thereafter. Payment terms for invoices vary, but it’s common to bill Net 30, which means the customer payment is due within 30 days. Invoices will age over time. The age is how many days it’s been since the bill was created. Receipt A receipt is generated when you make a sale and the payment is made at the time of purchase. It’s a tangible record of what you sold and what the customer paid. Accounts Receivable Accounts receivable are outstanding invoices that have yet to be paid. You’ve provided the product or service, sent an invoice to the customer, and the bill is waiting to be paid. Accounts Payable Accounts payable are bills you have received but not yet paid. Inventory Inventory includes those items you must have in stock in your business to fulfill customer orders.


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How Money Flows in a Business

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Cost of Goods Sold Cost of goods sold is an amount that reflects the total cost of a product you sell. This amount includes both direct cost, the hard costs for the tangible items that go into making or acquiring the product, and the expenses involved in turning the product into its final state. Cost of goods sold is also known as the cost of sales and is typically used in manufacturing and retail businesses. Breakeven Point Your breakeven point is always zero. It’s the point where total expenses equal total revenue. Amounts above your breakeven point are profit. Your breakeven point is one of the most critical numbers for your business. It tells you what you need in sales just to stay on the survival side of the business equation.

HOW MONEY FLOWS IN A BUSINESS Peg is a virtual assistant who sells her time to clients. She also has manuals and e-books for sale on her web site for instant download; plus she’s affiliated with another company that pays her a commission each time she refers a customer who buys their product. This month Peg has worked with 5 clients and sold 14 e-books. She generated invoices for her clients; one has already paid that bill. She’s been advised by her affiliate company that her customers have purchased eight of their products. Here’s what her revenue looks like for this month (Table 3.5). Peg’s monthly bills include rent, telephone, Internet service, and web hosting, plus she pays herself a paycheck so she has taxes that will be due. Peg’s income statement for the month is shown in Table 3.6. Note how the flow of money is recorded as income or expense and the ending net income.


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Peg’s Sales

Accounts Receivable (AR) Client #1 Client #2 Client #3 Client #5 Total AR

$ 326.50 1,239.00 427.00 805.00 $2,797.50

Cash Sales E-books Affiliate commission Client #4

$378.00 295.20 250.00

Total Cash

$923.20

Table 3.6 Peg’s Income Statement Income Consulting income E-book sales Affiliate commissions Total income Expense Rent Telephone Internet service Web hosting Payroll Payroll taxes Total Expense

$3,047.50 378.00 295.20 $3,720.70

$250.00 38.96 29.00 10.00 965.25 649.50 $1,942.71

Net Income

$1,777.49

Peg would use this statement from month to month and pay attention to what’s coming in and what’s going out. She should be able to analyze the historical data and track it to activities she is doing in her business. This does not tell Peg how much cash she has available. It shows only money coming in and going out of her business. You’ll see how this information transfers to the cash flow budget in Chapter 5.


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CHAPTER

4

s Finding and Keeping Cash in Your Business


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At some point in the life cycle of your business, you are going to need more cash. Whether you are trying to expand and need additional financial resources to capitalize that growth or are just trying to close the cash gap that has occurred because of a down business month, sooner or later a shortfall will occur. How you respond to that cash shortfall depends on how well you have prepared. You’ve probably heard the saying “Get your money from the bank when you don’t need it.” In a small business, that couldn’t be truer. You simply must prepare your business for a future cash emergency when it is flush with success. There’s no better time to obtain financial support than when your business is flourishing and your cash flow is steady. No lender will take the risk to loan you money when your business is already in financial trouble. Plan ahead. That’s exactly what Carmela Styles, owner of Safety and Ergonomics Consulting Services, LLC did. When Styles started her business, she knew she would be doing business with larger

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FINDING AND KEEPING CASH IN YOUR BUSINESS

companies, who have a tendency to take a long time to pay their bills. Although she had the cash to move forward in her business, she knew it was critical to have a cash flow cushion. It paid off for her. During the first few months of a large consulting contract she tapped her loan funds to collect a paycheck from her company. Once her client payments began, she was able to abandon using the loan proceeds and could collect from the flow of cash coming into her business. Without the loan, it would have been necessary for her to forgo the paycheck or dig into her own reserve cash funds. Because she used her loan proceeds wisely, Styles established a credit history for her business.

THE GOVERNMENT DOES NOT FINANCE SMALL BUSINESSES There are many different ways to acquire funds for your business. I talk about those in a few minutes. But first I want to dispel a myth you’ve probably heard. At least once a week, I get a call from a small business owner who is looking for cash from the government to start a business. They’ve heard about free money that’s available and want to get their fair share. You’ve probably even seen the ads in the newspaper and on television. Well, here’s the bad news. The government does not give away money to fund small businesses. So there you have it.

WHERE TO FIND MONEY FOR YOUR BUSINESS If the government won’t give you money, just where do you find it? Knowing where to look is half the battle. We start inside your business and spread out from there. Each option has its own share of risks. Some will take longer than others. Your business situation will dictate the right option for you.


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Where to Find Money for Your Business

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Shut Off the Flow The first place you should look to find money for your business is your compensation. Are you taking a paycheck? Are you taking distributions from the company? Stopping your own paycheck and distribution of funds for the short term can often take care of immediate cash needs for your business. Collect Money You’re Owed What’s pending on the cash side of your business? Would your cash crunch be resolved if more customers paid their bills? Take a look at what’s outstanding in your accounts receivable. Are there invoices overdue? Start with these first. Contact the customer directly and make arrangements to get your money. Don’t settle for “The check is in the mail.” Offer to put the balance due on a credit card. Offer to stop by and pick up a check. You’ll probably get only one shot at this since the payment is already overdue, so make the most of it. Be firm but professional. Your business survival depends on it. Next, take a look at other outstanding invoices. Contact the customer and level with them by sharing a bit about your situation. You don’t need to spill your guts, just explain your temporary cash flow crunch and ask if they could help you out by paying a bit before the due date. Your goal is to get them to pay early. You may even want to offer them a discount for making the payment right now. You could reduce the bill by 1 percent as an incentive and thank-you for working with your business. Sell Your Invoices There’s an entire industry that exists to buy outstanding invoices from companies. It’s called factoring. When you sell your invoices to a factoring company, you get immediate cash. In a cash crunch or business with a long payment cycle, factoring may be the answer. Here’s how it works.


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You sell your outstanding invoices to the factoring company for a percent of the balance owed. Factoring companies will typically advance you from 65 to 90 percent of your invoice amount. The factoring company then notifies your customer that they own the invoice and instructs the customer how to pay them. Once the factoring company is paid, they pay you the balance of the invoice minus their fee, which normally ranges from 1 to 4 percent. Factoring is a good way to get cash flowing in your business without acquiring debt. Let’s walk through an example. You have an invoice outstanding for $8,000. You sell it to a factoring company that pays 80 percent upfront. They buy that account receivable from you for $6,400 in immediate cash. Within a period of time they collect the total invoice amount from the original customer. You receive an additional $1,280. They retain a 4 percent fee of $320. So you have collected a total of $7,680 for your $8,000 invoice and you had most of that cash right up front (See Table 4.1). Do your research before taking action. If you decide that factoring may be the way to solve your cash flow problems, shop around for just the right company. Check with your banker or accountant to see if they have a recommendation for a local company. There are large factoring companies and small factoring companies. Some specialize in certain types of business or industries. Table 4.1 Factoring Sample

Sales invoice Factoring fees Net invoice amount collected

Invoice without Factoring

Invoice with Factoring

$8,000 $ 0 $8,000

$8,000 $ 320 $7,680


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Do a thorough check of fees and the factoring agreement. Once you’ve found possible companies, make sure you have full disclosure of their fees. Some companies require a deposit and a minimum amount of receivables before they will take your business. They may also require you to sign an agreement for a specific time frame. Make sure there won’t be any penalties associated with actions you might take on your receivables. Since this is a business agreement, it may be a good idea to get your attorney to take a look at it, too. Verify treatment of your customers. Since the factoring company will be dealing directly with your customers, it’s important to understand how they communicate with your customers and that they embrace the same values you do for customer service. Hire a Collection Agency We all want to think the people who do business with us will pay their bills. Unfortunately that’s not always the case for whatever reason. If you have invoices you’ve given up collecting on, handing them over to a collection agency may be the answer. It may be better than writing the invoice off as uncollectible or expending additional effort chasing the money. A collections firm will charge you anywhere from 20 to 50 percent of the invoice amount for their collection efforts. Getting half your money is better than nothing. Unlike factoring, collection agencies pay you when they get paid. This option is not a quick fix. Lend Your Company Money If you have personal cash to cover a temporary shortfall in your business, you could lend that money to your business for a short term. Make sure you don’t put a burden on your personal finances by doing this. Think long-term about the impact loaning this money will have on both your business and personal life.


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Ask Mom, Dad, or the Rich Uncle Family members want you to succeed in your business. Sharing your situation with a family member and asking for a short-term loan is often a good option. Make sure you handle the loan as a business transaction. Be professional about the loan agreement and payment schedule. Don’t ask for more than you need and make sure you pay it back. Use Credit Cards Credit cards are one of the easiest and most often used debt-financing options for small business owners. Companies that offer business credit cards are abundant. You may have even received an unsolicited offer in the mail. It’s a good idea to have at least one credit card for your business. It can get your business out of a cash pinch in an emergency and establish a track record of good credit practices for your company. But don’t let it get out of hand. Remember this debt must be repaid. Shop around for the best credit card option. Get a credit card with a low annual percentage rate and a minimum of other fees. You don’t want a card that will take a huge chunk out of your profits. Educate yourself on credit card terms by reading Choosing and Using Credit Cards in Chapter 9. Secure a Line of Credit A line of credit can be your lifesaver during a cash crunch. Most banks along with many credit card companies offer this type of service. A line of credit is an unsecured, revolving source of funds for your company that you can draw on when you need it. You won’t have to provide collateral to the lender, but you will need to prove to the lender that you have sufficient cash flow in your company to repay this debt. Some lenders allow interest-only payments on your line of credit to help you stretch the money a little further. Check the terms and agreements of your lender to see whether this option is available. Most line of credit


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companies will provide you with checks to use that post as a charge against your account. This option makes it easy to pay any bill your company has due. Use Your Home Equity Are you willing to put your home on the line to save your business? That’s what you will be doing if you get a loan or line of credit from the equity in your home. Using your home equity to finance your business puts both your business and personal life at risk by tying up your potential cash resources. Make sure you crunch your numbers carefully and have a specific plan for paying back any funds that you use. If you’ve decided this is your best option for solving your immediate cash flow problems, educate yourself first by reading Putting Your Home on the Loan Line Is Risky Business in Chapter 9. Get a Bank Loan The best way to get a bank loan is to be prepared with all the necessary paperwork. Don’t assume what the bank will need to process your request. Take a minute to answer the 14 questions on the Bank Loan Questionnaire in Chapter 9 before you begin. Business banker John Balestrieri says the amount you are requesting dictates what the bank requires. So do your homework first. According to Balestrieri, “The bank will want to know what the money is going to be used for and will match product (type of loan) to purpose.” You may find it easier to secure a bank loan through one of the smaller community banks than a large mega bank. Shop around to determine where you can get the best deal. Don’t expect to get one hundred percent of the amount you are asking for. Do expect to provide some type of collateral for the loan. Your bank will not assume all of the risk. They expect to share that risk with you. Cash businesses, those with no inventory or little collateral,


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are considered a higher risk by banks and may require additional paperwork to secure a loan. When you’re ready to ask for the loan, make sure you have practiced what you will say and have a good case for your business. The banker must be convinced of your ability to succeed and have confidence you will repay the loan. In many banks, this person will be the one to go to bat for you in front of a loan committee or underwriters group. Help them help you be successful. Pamela Elsaadi, director of operations for Saadi Investments, LLC, has been in business since she was a young woman. In her line of business she knows it’s critical to have capital to thrive, plus, Elsaadi says, it gives your business additional credibility when you have a credit history. She thinks it’s essential for small business owners to be very detailed with the bank to prove you have a solid history. Be prepared to present financial reports demonstrating potential profitability. Above all else, your request needs to make sense to the person who will approve your loan. Do the best you can to anticipate questions that may be asked by doing a dry run with a trusted friend or colleague. Bring in Equity Partners You may need to share part of your business to get the money you need. That’s called equity funding. The trade off with equity funding is that the person or company providing the funds not only owns a part of your business, but they can manage it, too. If you have a good business case and can talk a friend or colleague into funding your business, this may be a good option. Your equity partner may be a completely silent partner or they may want to run the business. You need to know and agree to this before accepting any funds. Make sure you determine the business arrangement up front. Document the funding package in a legal agreement so you know who does what and where responsibility lies for what aspect of the business.


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Apply for a Grant The options for getting a grant vary by business. Grants are offered by different businesses at different points in time depending on market needs and often are driven by government regulation. If you would like to check the possibility of a federal grant for financing your business, visit grants.gov, which operates a central database of all federal government grants available. At the grants web site, you can view, search, and apply for active grants. They also offer an e-mail notification list that anyone can subscribe to for free. The charter of grants.gov is to provide a simple, unified electronic storefront for interactions between grant applicants and the federal agencies that manage grant funds. There are 26 federal grant-making agencies and more than 900 individual grant programs that award more than $400 billion in grants each year. Grants.gov provides: • A single source for finding grant opportunities. • A standardized manner of locating and learning more about funding opportunities. • A single, secure, and reliable source for applying for federal grants online. • A simplified grant application process with reduction of paperwork. • A unified interface for all agencies to announce their grant opportunities, and for all grant applicants to find and apply for those opportunities. If you are serious about pursuing grants to improve your cash flow, plan to spend a good bit of time searching out opportunities, monitoring available grants, and completing the application process. Most grants are created to fill a very specific need. Two examples of grants available at the time of this writing are the Conservation Innovation Grant Program, which provides grants to stimulate the development and adoption of innovative conservation


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approaches and technologies, and the Brownfields Economic Development Initiative (BEDI), which is designed to help local governments redevelop brownfields, defined in the Program notice of funds available (NOFA) as abandoned, idled, or underutilized real property, including commercial facilities, where expansion or redevelopment is complicated by the presence or potential presence of environmental contamination. There are also state resources that may have grant opportunities available based on certain criteria. For a comprehensive list of links by state, visit the About.com U.S. Government Information site at usgovinfo.about.com/library/weekly/blstategrants.htm. Grants typically require a proposal and plan for consideration and come with a lot of baggage. Reporting how grant money is used may be more trouble than it’s worth for your company. One small company decided to forgo getting a grant they had been awarded because they would need to hire an additional person just to administer the paperwork that came with the grant. Make sure you look at the long-term impact on your business if you decide to go the grant route.

BEFORE YOU APPLY FOR A LOAN Taking steps to get ready before approaching a financial institution for a loan will increase your chances for success. Check Yourself How is your credit? If you have a track record of missed payments and overdue bills, the likelihood of bank’s lending you money is slim. The saying “Past history is an indication of future results” applies here. A lender will look at your past history as a determining factor of your ability to repay a loan. If you’re not sure what your credit looks like, the Fair and Accurate Credit Transactions (FACT) Act allows you to obtain


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Before You Apply for a Loan

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your credit report free once a year. Take advantage of that. You can order your free annual credit report from annualcreditreport.com. Check Your Business Are your financial reports up-to-date? What about your tax returns? What do they say about how you have managed your business? These records need to demonstrate a clear message of responsibility in managing your business. Be prepared to share at least two years of reports with a potential lender. What Assets Do You Own? Most likely any loan you secure will need to be backed by one of your assets. That’s to protect the lender just in case you default. What do you own? Are you willing to put it on the line to get the cash you need? Whom Do You Know? It doesn’t hurt to know your banker. This will help make you more comfortable asking questions and stating the case for your business. Have you taken the time to build a relationship with the key person at your bank? Do they know about your business? If not, find out right away who the key business banker is at your financial institution. Introduce yourself and find out what the requirements are for getting a loan. This person may have to speak for you after you have applied for your loan. Having a personal connection and a clear understanding of your situation will be a big benefit. How Much Do You Need? No, “gobs” is not the right answer. You want to make sure you ask for enough, but not too much to hinder your chances for getting the loan. The amount you request is determined by your need for the money. Are you purchasing equipment or proactively seeking a cash cushion?


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What is the absolute minimum you need? What would be ideal? Walk through your reasoning behind acquiring this debt to come up with an acceptable amount. How Will You Pay It Back? Any lender will want to know what steps you will take to ensure that their money is returned to them. Put together a realistic plan of action for improving the cash flow in your business and paying back the debt. Identify your marketing strategy and projected sales results over an expected time frame.


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CHAPTER

5

s Record Keeping Isn’t Drudge Work; It’s Priceless History


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Great news! You just secured that huge contract you’ve been waiting for. Now all your cash flow worries are over and you can move your company into profitability. This is the answer to your dreams. Or maybe not. A web services company thought their problems were over when they snagged a contract with a huge Fortune 500 company. But it just created more problems than they already had. In all the excitement they forgot to think about the resources needed to service the company. It almost sent them into financial ruin. The same thing happened to a small flooring contractor, who landed in the middle of a building boom. Tons of work was sent his way but the ability to pay the people who completed the work was beyond his reach. Promises of financial returns can force even tiny one or two person companies to take too large a risk, like the business consultant who

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RECORD KEEPING ISN’T DRUDGE WORK; IT’S PRICELESS HISTORY

spent thousands preparing to be part of a large company’s bid for government work that never materialized. In the excitement of doing business, it’s easy to forget about what it takes to get work done. Everything costs money. If your company doesn’t have the necessary cash resources on hand to get over the initial hump—from contract award to payment—you could be in trouble. But how are you supposed to know when a new business deal is good for your business? Believe it or not, a budget is your best friend. A budget can tell you when money is coming into your business, when it is going out, and when you have enough to cover those purchases you need to make. It’s a living document that provides the vision necessary to help you reach your sales goals, time your marketing messages, and purchase that hot new gadget you absolutely must have. A budget can also help you prevent peaks and valleys in your cash flow. If your business suffers from “buyer seasonality” a budget can help you predict and plan for the lean times so your business doesn’t suffer. Without a budget, your business is running blind. Sadly, that’s the way most small business owners run their business. But that’s everyone else. It’s certainly not you. Right?

WHY BUDGET? So how can your budget be your friend? By simply providing you with enough information to make informed decisions about the action you will take in your business. To do that, your budget needs to project far enough into the future to give you time to plan and react to accommodate those things that impact your business and allow you to adjust accordingly. If you’ve never completed a budget before, it can seem like a


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Your Budget Time Frame

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daunting project. But remember, it’s the road map for your business success and will pay off for you in the long run. It’s key to ensuring that you have money for future activities and are making good financial decisions. It’s pretty simple, really. Your budget will show the reality of where your money is going. The best way to remember how it works is to think of this simple statement: Sales minus expenses equals cash available. That’s not hard, is it? Remember we’re talking cash here. The sales and expenses on your budget are those items where cash has exchanged hands, not those that are expected to. An important distinction to remember is that a budget is not a forecast, which is a prediction of some future activity. A budget is a planned or expected outcome that you want to achieve. It identifies where money will come from and where it will go, presenting a perfect picture of your breakeven point and cash availability. Keep that in mind as we go through the budget creation process.

YOUR BUDGET TIME FRAME When do you complete your budget? A good place to start is with an annual budget at the beginning of your fiscal year. Most small businesses work on a fiscal year that mirrors the calendar year so that means your budget would run from January through December. You should be preparing your budget for the next year in October of the previous year. It’s a good idea to have at least a three-month view of your budget data. Don’t forget your budget is a living document that you will use as your guide. You’ll be reviewing your budget daily, weekly, or monthly depending on the needs of your business and your business objectives. Your budget can be adjusted if you identify trends that are different from the original budget calculations.


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GATHERING YOUR BUDGET DATA The best way to get information for preparing your budget is to look at the past history of your business. If you have your financial records, this will be easy for you. Let’s take a look at the three critical components of your cash flow budget: Cash Inflows, Cash Outflows, and Cash Balance. Cash Inflows (Sales)—This is the stuff that makes every small business owner’s heart sing: money coming into your business because you’ve sold your product or service to a customer. Cash Outflows (Expenses)—It costs money to be in business. There are a variety of expenses that you’ll have to pay to stay in business. Cash Balance—This is what is left over after you have subtracted your expenses from your sales. If your balance is positive, that’s a good thing. If your balance is negative, you need to take quick action by adjusting sales or expenses to make it a positive number. You can create your Cash Flow Budget by first identifying the data you need to capture. It’s very simple. Just take out two pieces of paper. Label one Sales and the other Expenses. Cash Inflows (Sales) So what qualifies as a sale? Any product or service your company provides to its customers where money is exchanged. Sales can come in the form of products such as books or other hard goods, service fees, project fees, consulting fees, or jobs completed. Whatever you call it in your company, if you’re providing something to someone else for money that’s a sale. Look at the past history of your company. Gather your income statements and balance sheets. What have you sold? Collect all of your sales receipts and paid invoices if you need them; group


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Gathering Your Budget Data

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them into common themes and write them on the Sales sheet. Your list might look like this: Services • Consulting • Service calls • Membership fees Projects • ABC Group • Warren Industries • Scoot Pro International Items • Workbooks • Accessories Cash Outflows (Expenses) Expenses can be few or many depending on the size of your business. You’ll have monthly expenses, quarterly expenses, and annual expenses. Some expenses will be exactly the same every month and others will vary depending on what is happening in your business. The point for this section is to make sure you collect every single item so you have a true picture of what it costs you to be in business. You can get this information from your income statements and balance sheets, too. To make this a less overwhelming task, first list your monthly expenses like rent, utilities, web hosting, payroll, marketing, and loan payments. Then list your occasional expenses (quarterly/annual) such as insurance, accountant, attorney, training, and subscriptions. Once you have all your receipts collected, group them into common themes and enter them on the Expenses sheet.


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Table 5.1 Sample Cash Flow Budget Jan Sales Consulting services Book sales Affiliate sales Total Sales Expenses Licenses and permits Payments to creditors Payroll (salaries and wages) Meals and entertainment Payroll taxes Affiliate commissions Subcontractors Office expense Internet expense Printing Insurance Utilities Office supplies Advertising Marketing/Promotion Professional fees Training and education Tax payments Dues and subscriptions Total Expenses Cash Flow Surplus/ Deficit (–) Opening Cash Balance Closing Cash Balance Minimum Cash Target

$3,000 635 380 $4,015

Feb

Mar

$2,800 $5,600 245 852 400 250 $3,445 $6,702

Apr

$8,500 476 600 $9,576

May

Jun

$1,600 $2,200 210 345 250 300 $2,060 $2,845

$150

$0

$0

$0

$150

$0

100

100

100

100

100

100

2,000

2,000

2,000

2,000

2,000

2,000

75

75

75

75

75

75

642 642 642 55 55 55 0 0 0 25 150 25 49 49 49 0 0 0 0 0 450 150 150 150 175 175 175 725 0 0 100 100 100 0 0 0 0 3,000 0 0 0 86 0 90 0 $4,246 $6,586 $3,907 $(231) $(3,141) $2,795 $6,000 $5,769 $6,000

642 642 642 55 55 55 1,200 0 0 25 25 25 49 49 49 0 345 0 0 0 438 150 150 150 425 175 175 0 250 0 100 100 100 0 225 0 0 0 0 0 0 86 0 0 29 $4,821 $4,341 $3,924 $4,755 $(2,281) $(1,079)

$7,819 $5,678 $9,173 $16,128 $15,192 $4,678 $8,473 $13,928 $13,847 $14,113 $6,000 $6,000 $6,000 $6,000 $6,000


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Monitoring Your Budget

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CREATING YOUR CASH FLOW BUDGET Transfer your sales and expenses to the Cash Flow Budget worksheet you will find in Chapter 9. Don’t forget to include your January opening cash balance. Take total Sales and subtract total Expenses. This will give your cash flow surplus or deficit for the month. Add to that your opening cash balance and the result will be the closing cash balance. That’s it. Now you need to do the same thing for every single month of the year. The result is a clear picture of whether your business will be cash flow positive or cash flow negative for each month. This will help you decide what you need to do as you conduct your day-to-day business. On the Cash Flow Budget worksheet you’ll notice another item labeled Minimum Cash Target. It’s a really good idea to enter a number in this field. The amount entered is the minimum cash you want to keep on hand in your business for emergency situations. A good rule of thumb here is an amount equal to three to six months of expenses. In Table 5.1 is a six-month view of a Cash Flow Budget for a consulting firm. Pay special attention to the Cash Flow Surplus, and the Closing Cash Balance in relation to the Minimum Cash Target.

MONITORING YOUR BUDGET So what do you do with your budget once it’s complete? Don’t stick it into a book to collect dust. To get the most from your cash flow budget, you need to monitor it on a regular basis by plugging in actuals as the year progresses. At a minimum, take the monthly financials your accountant provides and compare to your budget. You’ll want to check whether your sales are as you planned and that expenses are in check. Major fluctuations, up or down, in sales or expenses should be a red flag for you to take action. Late in the year, my company’s phone costs had risen quite a bit above the projected amount. A little digging found the culprit: increased


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faxing due to a new project. I looked at alternatives and chose an online faxing service that will save roughly $500 a year. A budget isn’t all about bad news. You can use your budget to show the results of a marketing promotion or new product or service you’ve rolled out. Just make sure when you project your numbers that you do so conservatively. We small business owners are an optimistic lot. We like to think that everyone in our target market will seize the opportunity to buy something as soon as we offer it. But that’s not always the case. If you ambitiously think that one hundred people will buy your new product, knock the estimate down a notch when it comes to your budget. It’s better to underpredict your sales than it is to overpredict. One enterprising entrepreneur created an online business around his favorite pastime—sports video games. He self-published strategy guides that turned into a consistent moneymaking machine, but he knew he could do more. He launched an affiliate program for his strategy guides allowing other gaming enthusiasts to sell his guides for a commission fee. This strategy caused his sales to skyrocket and produce the best sales month ever. Now he can analyze his business strategy and tactics to ensure that his success is duplicated time and again so he adds consistent revenue to his bottom line. Without the ability to monitor changes in your cash flow, there’s no way you can tell what’s working and what’s not. Keeping tabs on what’s going on in your business by regularly comparing actual to budget figures can save (and make) you a lot of money.

USING YOUR BUDGET AS A DECISION-MAKING TOOL Your budget can help you make proactive decisions about your business, too. Three common uses for your budget are (1) to help you determine whether you should accept work that is being offered, (2) to ease the peaks and valleys in your business by improving sales and spreading out expenses, and (3) to assist in decision making about new


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purchases for your company. Let’s look at each situation from a specific business perspective. Then, you can translate them into how they would apply in your business. Accepting New Projects in Your Business Never agree to take on new projects until you’ve assessed what they will do to your cash flow. Being prepared is half the battle. If you go into a new project with your eyes wide open and have a plan of action, you’ll be much more successful. John runs a web company with five employees, which provides online presentation services to a broad sector of the market. Most of his customers are small to medium businesses that are each assigned an account executive to take care of their business requests. Companies come to John’s company with a rough idea for an online presentation, the account executive works with them to create just the right approach, then the creative team whips up the best presentation they have to offer. The technical team takes over from there and loads the presentation onto the customer’s web site. Job done. John keeps several prospects in the sales pipeline so he has a steady flow of work for his team and manages to keep his cash flow bottom line balanced. His bank balance is not flush with cash and he’s had a few months where it’s come close to being negative, but he’s managed to squeak through and maintain his positive bottom line. He watches expenses closely and keeps his sales rep busy looking for new clients. His account executive does a good job maintaining recurring business from past clients, which adds a lot to the bottom line, too. Joe’s cash flow for the next six months is shown in Table 5.2. John recently had an opportunity to negotiate some business with one of the giants of the Fortune 500 scene who took an interest in what his company had to offer. He’s been meeting with them for a couple of months and now they’re ready to sign a contract. The fee they will pay is equal to what all of his clients pay him together today. The project is


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Table 5.2

Sales Expenses Cash Surplus/ Deficit

Cash Flow Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

$35,085 $32,875 $ 2,210

$41,305 $32,875 $ 8,430

$33,405 $32,875 $ 530

$34,925 $32,875 $ 2,050

$32,905 $32,875 $ 30

$38,645 $32,875 $ 5,770

scheduled to last at least one year. He is so excited about this deal. And he’s ready to sign on the dotted line. But that would be a huge mistake. Taking on the work for this company will require every single employee of the organization to be dedicated to this giant. Gone would be the dedicated team of people who worked for the clients who kept his company moving along. It puts John in an either/or position by forcing him to decide between several small jobs that have kept his bottom line stable or one big job. And one key factor to consider is the payment schedule. Right now John’s invoices get paid at a pretty steady pace by his current customer base. Dealing with the giant might not provide that same opportunity. Most large companies traditionally take much longer to pay their bills. Since John currently cuts his bottom line pretty close, not receiving payment for a month or more could send his business down the tubes. Take a look at what could happen to John’s cash flow in Table 5.3. He’s got a major problem in months 2 and 3. Table 5.3 Cash Flow with Corporate Client


Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

$35,085 $32,875 $ 2,210

$ 0 $ 0 $32,875 $32,875 ($32,875) ($32,875)

$42,000 $32,875 $ 9,125

$42,000 $32,875 $ 9,125

$42,000 $32,875 $ 9,125


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63

So what should John do? Before he agrees to anything, he needs to consider how and when the new project will impact his cash flow. For that he’ll carefully assess his cash flow budget. He’ll need to take into consideration the time frame that this work will impact his company and decide accordingly. Here are three of his options.

1. Hire more staff to accomplish the work for this company, but that’s going to make a big hit on Expenses way before he adds to Sales. He needs to take a serious look at how he will compensate for this change before he agrees to move forward. This is a high-risk decision. 2. Turn down the work and keep sailing along with his current customers. This is a low-risk decision. If he wants his company to grow slowly, he can continue to take this approach and watch his bottom line improve as he adds more satisfied clients to his list. 3. Offer a do-it-yourself option to create a passive income stream for his company. This could take some up-front work, but it would allow him to take the risk on the new client and still have a steady income stream from current and new clients. This decision carries medium risk. What did John do? He combined option one and option three, added two new employees, took a minor dip in his cash flow, and is well on his way to becoming a major business player. You can see how that will impact his cash flow beginning in month 2 in Table 5.4.

Table 5.4


Cash Flow Using Options 1 and 3 Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

$35,085 $32,875 $ 2,210

$35,000 $35,000 $42,459 $42,459 ($ 7,459) ($ 7,459)

$77,000 $42,459 $34,541

$77,000 $42,459 $34,541

$77,000 $42,459 $34,541


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John has to add two employees to his staff to manage the do-ityourself option and support continuing clients. That increases his expenses in month 2 but it allows him to retain some of the past client work and get those new sales going in addition to taking on the corporate client. John was able to retain $20,000 of his old business and add $15,000 on the do-it-yourself option, which positioned him much better in months 2 and 3. He still has a problem he’ll have to resolve, but not nearly as big as it would have been with option 1 alone. Once the corporate payments kick in at month 4, he will be in really good shape. Easing the Peaks and Valleys I haven’t met a business owner yet who doesn’t encounter peaks and valleys in their sales cycle. That’s one of the biggest complaints I hear because coming up short of cash can cause an awful lot of sleepless nights. If you use your cash flow budget to look at the big picture and act accordingly, you’ll sleep much better. Some of the most obvious businesses that take a huge hit on their cash flow are companies who work outside. It’s tough to maintain a steady cash flow on a pool building business in the dead of winter. Same thing applies to a lawn maintenance company. But they’re not the only ones. Many service firms, especially in the consulting industry, suffer from huge ups and downs due to the whims of the people who use their services. Using your cash flow budget to get a clear picture of what’s happening can help you take the action necessary to prepare for the lean months by reducing expenses or by spending time before those months occur to add new revenue streams to your business. Stacy’s pool building business is a star in the spring and summertime when everyone wants to get away from the heat. But in the winter, her cash flow is just a dribble, plus she has to ramp up and hire employees when business is good and lay them off when it isn’t. Once the season starts again, she always has trouble meeting payroll for the first month because the work has started but the money isn’t rolling in


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yet. Stacy wants a way to even that cash flow out. She has at least a couple of options.

1. She can be very frugal during her booming months to ensure that she has the correct amount of cash during the lean months. That could fix her cash flow but doesn’t solve her employee problem. 2. To maintain an even flow of business, Stacy could add a service option for pool owners. This option would save them the hassle of pool maintenance and ensure that their pool stayed in tiptop shape. Because even winterized pools need some maintenance, this would allow her to maintain a steady pool of employees. Stacy could offer this to her customers as an annual, quarterly, or monthly billing option that would give her the cushion she’s looking for in her cash flow budget. What did Stacy do? She set aside cash from her strong sales months, which is a really good idea for all business owners. In addition, she implemented the Hands Free Pool Maintenance Program and her customers love it. It’s a growing part of her business that continues to increase her bottom line. Mike can barely keep up with his lawn business in the summer with customers calling almost daily to have their lawns mowed, but during the fall and winter things really slow down. Everything goes stagnant and lawns need mowing only once a month. Since he charges by the mow, winter is pretty lean around his house, plus during any given month he may complete 20 mows or 50 mows. It all depends on the whims of his customers. His cash flow budget looks like the Rocky Mountains. Mike needs to find a way to have some cash flow stability so he can depend on the income from his business. He has several options.

1. The first action Mike should take is to stop doing business by the mow. There’s no way his cash flow will ever provide the stability he


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desires on an ad hoc basis. He can use this option as a possible alternative, but as a primary business model it’s ineffective. 2. Mike should establish a mow schedule for his customers tied to a monthly fee and set up his customer agreement on an annual basis. He can promote this as a specific number of mows per year with more frequent mows during the summer months. This will provide him with consistent income across all 12 months of the year and a good selling point to bring new customers on board. 3. There are other types of businesses that provide lawn services— pest control, fertilizer, weeding, and shrub maintenance—that Mike could partner with to add passive income for his business. He could set up a paid referral system or residual income system to add extra cash to his bottom line. What did Mike do? He implemented option 2 and now has a business with a steady income flow to allow better business planning. His customers are happier, too, because they don’t have to initiate a call every time they want their lawn mowed. He’s looking for partners to add additional income to his bottom line. Susan’s proposal writing firm is always busy in the spring and the fall, which coincides with request for proposals from large companies and the government. But in the summer and winter cash flow is just plain dead. Having two really slow seasons where cash flow is pretty much nonexistent is causing Susan a lot of sleepless nights waiting for the next windfall to arrive. Her cash flow budget looks like the humps on a camel’s back. Susan’s biggest problem is she’s a solo professional who can’t market and do work at the same time. There are just not enough hours in the day. So during her busy seasons she can’t do the marketing she needs to do to ensure that she has alternative income during her down time. Susan has a few options.

1. She can outsource part of the work that happens during her busiest times of the year to other professionals she knows and trusts. This will have a negative effect on her cash flow if her work load stays the


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same, but offers her the opportunity to both take on more work to increase the cash flow during the peak season and to spend the time necessary marketing her business so she has work and cash flow during the off-season. 2. A portion of Susan’s target market are “do-it-yourselfers.” That means she has the opportunity to create a manual, CD, training course, or book to sell her knowledge. This would be a good way to set up her business with a passive income stream that makes money without her having to contribute her precious time. 3. Susan could also get into the speaking circuit specifically to close the gap that’s created by her downtime. She already has a dedicated client base that would be a good start for marketing this service. 4. Leveraging her network is another smart business strategy for Susan. During her busiest months she can put her network to work looking for potential partnership opportunities that could be seized during her off-season. What did Susan do? She put her network to work right away and has found a few off-season consulting projects that will help in the short run. She’s working on releasing her first “how to” book which will also be sold from her web site. Not one who feels comfortable in front of a crowd, she’s still thinking about the speaking gigs and may implement that at a later date. She plans on hiring an outsourced professional during her next big season to help with the proposal writing. Making New Purchases Your cash flow budget planning should include when you plan to acquire new equipment for your business. Everything from software to computers to machinery falls into this category. Your budget should identify the month of purchase so you will clearly see how it impacts the cash flow in your bottom line. June owns a print shop that requires up-to-date software for graphic jobs and printing equipment to get her customers’ print


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work out the door. She knows the software she uses is going to be upgraded in March. She has to decide if the version is critical to her business and will need to add it to her cash flow budget as an expense for March. She also has a copier that’s on its last legs. Maintenance costs for this machine have escalated over the past few months and it’s no longer cost effective to use. She needs to shop around to find the best deal and look at her cash flow budget to determine the best month for the purchase. Unfortunately, at some point in time, all of your business equipment will need to be replaced. But sometimes you just have to buy something that’s not in the budget. Emergencies occur in every single business. A key piece of equipment breaks down during a huge project and you simply must spend money to take care of the problem. That’s why it’s so important to have a cash flow cushion. If your cash inflows match your cash outflows every month, that’s good but it will be very difficult to get ahead. Plan your cash flow budget to set aside a certain amount every month to ensure that you’re not stuck with a problem that could cause your business major headaches.


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CHAPTER

6

s Charging the Best Price to Keep Your Business Healthy


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L ow price, mid price, high price? A major dilemma and moving target for most small business owners is what price to charge for their product or service. The most intuitive thought is not always the right answer. So how do you figure it out? There are different methods for determining what price you will charge. One thing’s for sure. You need to charge enough to break even, make a profit, and get the cash flowing through your business. You can’t just grab a figure out of the air. Most small business owners severely undercharge for their services. Joe is a personal trainer who visits his clients at their location. He is investing 70 hours a week. He charges his clients $35 per hour and just can’t figure out why he doesn’t have more cash in the bank with all the hours he is working. Let’s break down one week in Joe’s business. His first client appointment of the day is at 7:30 a.m. It takes 30 minutes to get to the client’s location so his day starts at 7:00 a.m. when he climbs into his car

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CHARGING THE BEST PRICE TO KEEP YOUR BUSINESS HEALTHY

and hits the road. He spends one hour at each client’s location and then travels to the next appointment. Because his clients are all over the city, Joe can manage eight client appointments per day, and he works five days a week. His last appointment ends at 8:30 p.m. and he heads home, arriving around 9:00. He’s exhausted. If you consider that he is spending 14 hours a day, every day, and has no time to live his life or deal with other business issues, you know he can’t do this for long before getting burned out. When Joe initially calculated his hourly rate, he backed into it using the time-based pricing method. He decided he wanted to make $1,400 a week. He based his week on 40 hours servicing clients and came up with his hourly rate of $35 an hour. What he did not consider was his overhead—things like his travel time and gas plus other expenses needed to run his business. If you look at just the hours he is dedicating, Joe’s actual hourly rate is only $20 an hour ($1,400 divided by 70 hours). Once you subtract the expenses he has to pay to keep his company in business, the reality is much worse. You can see what’s happened in Table 6.1. Pretty bleak, huh? Joe’s making about 30 percent of the rate he planned on. That’s not all. With the hours he’s spending, Joe has no time to take care of the tasks required for running his business. That means he’s going to have to pay someone else to do them, which will increase his overhead. He can’t take on more clients. There’s just no time. So what is Joe to do? Before he picks another number out of the air, he needs to analyze the situation. Table 6.1 Hourly Rate Plan versus Reality Joe’s Plan Target Income Target Hours Hourly Rate

Joe’s Reality $1,400 40 $ 35

Income Actual Hours Weekly Expenses Hourly Rate

$1,400 70 $ 650 $ 10.71


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THE COMPONENTS OF PRICING There are four components you need to take into consideration when pricing your services: actual cost plus profit margin, target market, competitor pricing, and your value added. Actual Cost + Profit Margin + Target Market + Competitor Pricing + Your Value Added = Your Price Actual Cost Plus Profit Margin Whether you are selling a product or a service, there are costs involved in getting it to your customer. Your actual cost should include any materials, labor, and other company overhead, along with a percent of markup for your profit margin. Target Market Are your prospects the frugal type or a more affluent segment of the population? What are their hot buttons? Knowing who your target market is helps you set a starting point for your fees. Competitors Pricing How much do the people who sell what you sell charge? You can discover this by digging around on the Internet and doing a little mystery shopping by calling various companies and checking out their marketing materials. Your Value Added This one’s the toughest to put your finger on. What exactly makes you different from everyone else? Do you go the extra mile to provide spectacular service? Are you always available? Do you have super-duper credentials? Why do your clients do business with you?


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PRICING IS ABOUT EMOTION, TOO Some people buy purely on price. They’ll drive halfway around the world just to save a dollar. Thankfully that’s not the majority of the population. Most people buy emotionally, because something makes them feel better or look better, or because the purchase takes away some type of pain in their life or solves a big problem. It’s all about emotion, not logic. Don’t believe me? Think about Starbucks coffee for a minute. Had a latte lately? Why go to Starbucks instead of dropping in at your neighborhood convenience store when you need a good cup of coffee? It’s just not the same is it? That’s emotion driven buying. Your customers buy with their emotions, too. Keep that in mind when you set your prices.

PRICING METHODS There are two primary methods for determining your pricing for services: time-based and value-based. Time-Based Pricing Time-based pricing works on the concept that all fees focus around a rate of some sort, like an hourly rate. The problem with time-based fees is that it limits how much money you can make and ultimately the amount of cash coming into your business. Have you ever met anyone with more than 24 hours in a day? Me either. Some would argue that you can always raise your rates if you charge by the hour. That’s true. But you’re always going to have a cap on how much your clients are willing to pay by the hour. Every time you raise your rates, you have to go through the process


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of letting all your clients know and risk many of them bailing out. That’s not my idea of a good use of time when there are so many other important tasks to be done in a small business. On top of that, you have to painstakingly track all your hours so you can bill clients properly. What if you work really fast? Charging by the hour actually penalizes you for doing good work. When you charge by the hour, you end up with a job, not a business. If you’re convinced that charging by the hour is the way to go in your business, make sure you calculate it properly so you don’t end up like Joe. Remember the formula for calculating your prices? Actual Cost + Profit Margin + Target Market + Competitor Pricing + Your Value Added = Your Price Value-Based Pricing With value-based pricing, you take the hourly rate completely out of the picture and place the focus on the value you provide to your customer. Think about what problem your clients want you to solve for them. Do you help them improve their business bottom line, make them look better, improve employee morale, or increase their customer base? Something else? When you focus on what problem is solved by what you have to offer, price becomes less of a factor. Think about the last time you were ill. Did it really matter what the doctor charged to make you well? No. You just wanted the problem solved. Your customers want their problems solved, too. Your business really is all about them. Your pricing should be, too. Don’t forget to use the formula for pricing this service. Actual Cost + Profit Margin + Target Market + Competitor Pricing + Your Value Added = Your Price


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Table 6.2

Value-Based Problem Solving

Discover how you can comfortably work in your business and on your business at the same time. Get a structured, systems-based approach to running and growing your business that won’t leave you feeling overwhelmed and out of control. The Jordan Result—www.thejordanresult.com We are constantly striving to increase your bottom line. We’ve discovered that working with the financial information available over the Internet helps to keep costs down and saves you time and money. Flemming Business Services Inc.—www.flemmingbusinessservices.com Let us help you determine where the holes are in your marketing system (you know, the holes that are leaking money) and then let us help you build a tactical plan of action to create a world-class marketing system that operates like a welloiled machine. Fire Mountain Marketing—www.firemountainmarketing.com

In Table 6.2 are some great examples of value-based problem solving.

ASK YOUR CUSTOMERS One thing most people never think of is to ask their customers what something should cost. It’s a pretty radical idea, but one that could pay off for your bottom line if you are using value-based pricing. Many times your customer or prospect will quote a figure much higher than you’ve considered. That gives you a lot of room to (1) accept the price or (2) lower the price to show how much you appreciate their business. One thing to note. If you use this method and the customer proposes a lower fee than you hoped for, you can always tell them no and offer an alternative. Also since you own the business you can decide whom to do business with and you may decide someone who wants a lowball price just isn’t worth it.


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Pricing Your Soft Products

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PRICING YOUR HARD PRODUCTS Pricing products can be tricky, too. The general rule of thumb for pricing a product is Product Cost + Markup = Price Product Cost Product cost is the actual amount you pay per item to acquire the product from your vendor. Markup Markup is typically expressed in a percentage and is comprised of all your operating expenses like salaries, rent, and marketing. It must also include your profit margin. It’s important you analyze how each of your operating expenses plays a part in getting this product from your vendor into your customer’s hands so you price it properly. You may determine that your total markup is 80 percent with salaries being 30 percent, rent 15 percent, marketing 20 percent, and profit of 15 percent. Some companies determine that a flat percentage rate markup like 100 percent covers all their costs. That’s an option for you, too. But be careful about this. Some products may actually require more back end work that a flat rate amount won’t cover and you’ll take a loss. You’ll have to decide what will work best for your business. Competition is an issue in pricing a product, too. If your prices are way above your competitor’s, your value added for the customer needs to be really high to prevent objections to your price.

PRICING YOUR SOFT PRODUCTS If you’re selling soft products like e-books, online manuals, video and audio, and have an automatic process set up for these items, most of


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your price will be pure profit once you’ve reached the breakeven point that covers your development costs. Assess what you have to offer against your competition and your value added to determine just the right price.

LIFETIME VALUE OF YOUR CUSTOMER Another component of pricing you need to consider is the lifetime value of your customer. You may choose to set your prices lower to capture the initial customer purchase, and then sell to that customer again and again. To determine the lifetime value of your customer, you have to know what they buy, how much they buy, and how long they buy from you. Also you want to include any business they bring you in terms of referrals and calculate those sales too. You can calculate what your customer is worth over their lifetime of doing business with you by using the approach in Table 6.3. I overheard a remark the other day. It was, “Oh, that lady. I barely pay attention to her. She comes in twice a week but spends only about five dollars. What a waste of my time.” Have you had the same thought about any of your customers?

Table 6.3 What Are Your Customers Worth? 1. Average annual revenue per customer 2. Average years as a customer 3. Individual customer value (1 × 2) 4. Number of new customer referrals over the customer’s lifetime Total referral value (3 × 4) Actual lifetime value of one customer


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79

Testing Your Prices Table 6.4 The Five-Dollar Customer 1. Average annual revenue 2. Average years as a customer 3. Individual customer value (1 × 2) 4. Number of new customer referrals over the customer’s lifetime Total referral value (3 × 4) Actual lifetime value

$520.00 10 $5,200.00 10

$52,000.00 $57,200.00

Before you dismiss the customer who spends only five dollars, take a look at her long-term value in Table 6.4. If this customer visits your business twice a week and spends five dollars each time, her total contribution is $520 for one year. If she purchases the same amount over a 10-year period, that’s $5,200. Not a bad sum of money, and it doesn’t stop there. If she’s a happy customer, she’ll more than likely tell a few friends. Let’s be conservative and say she tells 10 friends who have the same spending habits she has. Do the math. Over 10 years that would amount to $52,000. Your five-dollar customer is worth $57,200! You should be treating her like a queen.

TESTING YOUR PRICES The best way to know what works in your business is to test it out. Often adjusting your prices a tiny bit up or down can make a huge difference in your bottom line. If you are selling a product for $8.00 and 1,000 people buy it, increasing that price by just $.50 can yield an additional $500. On the other hand, if you reduce the price by $.50 and that increases the number of people who buy it to 1,250, you will make an


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additional $1,375. You would make an additional $875 by decreasing the price and opening up the product to a larger market. Who would have thought? Moreover, you will have 250 additional customers with a lifetime value. The only way you are going to know what will work for your business is to test. That’s the focus of MarketingExperiments.com. In October 2005 they conducted a pricing test showing different variables for two different pricing scenarios. The entire brief is in Chapter 9. They suggest three points to consider as you test your prices.

1. Unless you are selling a commodity or a product that competes in a market ruled by rock-bottom prices, there is always some flexibility in your pricing. So you do have the opportunity to test. 2. Finding the best price for a product, service, or subscription is both a science and an art. A prospect’s perception of your product or service will play a part in determining their own opinion of the right price. However, the price itself can also have an impact on how the product or service is perceived, thus creating a kind of causal loop. Within this loop, you have to find the price point that brings you the highest revenues. 3. A very small difference in pricing can have a huge impact on your revenues. This is particularly true if you sell high volumes, or if you sell a subscription, which could continue for years.


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CHAPTER

7

s Using Your Hidden Cash Resources to Grow Your Business


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Finding money in your business is not all about raising prices or cutting staff. There are hidden resources in your company that, when adjusted properly, will make a powerful impact on your bottom line. Some of these resources are directly related to your sales procedures; others are indirect actions you can take to keep more money in your business. All tie in to the way your business operates and the processes and procedures you use to service your customers. Most small business owners don’t think to look for ways to find more cash in their business when things are moving smoothly along. It normally takes a crisis of some sort to push us into action. What if your top client suddenly stopped doing business with you? What if a weather crisis like a tornado, flood, or hurricane prevented you from operating normally? What if your key salesperson became ill and couldn’t produce for your company? What if a major disaster occurred? Drum Associates, Inc. provides executive human capital solutions, with services ranging from executive search, middle management

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USING HIDDEN CASH RESOURCES TO GROW YOUR BUSINESS

recruitment, management assessment, market analysis, and executive coaching and development. Brian Drum, president and CEO has faced much diversity in his 37 years in business. Located in New York City, his company overcame the ultimate cash flow challenge after the terrorist attack on the World Trade Center on September 11, 2001. His business came to a screeching halt on September 12. There was no business. There were no clients. He had to move fast. Drum took immediate steps to solve what could have been huge cash flow problems and determined a priority for outgoing cash commitments. His top priority was making sure employees got paid. Then he identified what services were critical to his company, like the phone and Internet. Last, he prioritized which vendors would be paid—small vendors were paid first, then large ones. Then he looked at the long-term view. He assessed his business model and determined that making changes in salary structure and organizational structure would have a large impact. His original business model for compensation was commission driven. An employee’s compensation was completely tied to how many sales were made that month. This model was a major cash flow roller coaster ride. Commissions could be high one month and low the next. Drum flattened out the highs and lows of his cash flow by changing to a project driven structure, which paid employees a base salary plus bonus. Changes to his organizational structure were paramount, too. He went from a several department silo organization to a flatter, teambased matrix organization. This created the opportunity to utilize the skills of all employees where they were needed most at any given time. The reality of business life is that we keep doing things the same way we always have because it’s the comfortable thing to do. Having cash in your business is critical to your survival. That means you should be consistently seeking ways to increase the cash in your business. You may need to look outside your comfort zone to find those ways, primarily to question why you are doing something, how you could do it bet-


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ter, and create an action plan to correct it. You can use the template Creating Your Strategic Action Plan in Chapter 9. Creating Your Strategic Action Plan Where Are We Now? Assess your current situation. Identify what your business is doing well and why. Look at what services or products you provide to whom and whether they are meeting your expectations. Document why or why not. Be as specific as possible. How well are you doing meeting your past objectives and why? Think about what have been your barriers to success. Where Do We Want to Be? Why does your company exist? Review, update, and prioritize goals and create specific objectives to achieve your mission. Jot down any key thoughts to remember. What Do We Have to Do to Get There? Identify any factors that are critical for your success. Detail what must go right to achieve the objectives. Now identify possible barriers. You want to include those conditions that can hinder the achievement of objectives.

CHANGE YOUR CASH INFLOW PROCESSES To find extra cash, first take a look at your incoming cash processes. Your Company Is Not a Bank Who decided that some types of work would be based on the concept “Do the work first and if I like it I’ll pay you”? That may be how you are working if you provide any type of consulting services. Here’s a typical scenario. You negotiate to complete a project for your client. It takes three months from beginning to end. Once you’ve finished the project,


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you turn it over to your client along with an invoice that’s due to be paid in 30 days. From the time you agreed to the project terms until the day you (maybe) collect your cash, four months have gone by. You have granted this client four months work of credit and you didn’t even charge them interest. You simply cannot conduct business like a bank if you want to keep the cash flowing in your business. It’s critical that you structure your services so you are getting a portion, if not all, of your fees upfront. If it’s a long-term project, consider setting deliverables that are tied to payment points that flow with the progress of the work. You may be thinking that collecting money before a project begins will be an impossible task and no one will do business with you anymore. Quite the contrary. Think, for a minute, about the last time you bought groceries. Did you approach the manager and say you’d be back to pay for them once you had made sure the food tasted good? Of course you didn’t. That would be absurd. The conditions for doing business with the grocery store are that you pay for your purchase upfront. You need to establish conditions for doing business with your company, too. It might make sense for you to make it a policy to turn over completed work only when the payment has been received. Stay on Top of Receivables If you absolutely must invoice your customers, make that a top priority. Two steps are critical. First, make sure you invoice customers as soon as the work has been completed. Don’t wait even a day. The longer you wait to issue an invoice, the longer you will wait for your money. I had to practically beg one small business owner who provided virtual assistant services for my company to send me a bill. When I brought it to her attention, she laughed and said that was a step she often forgot. That’s not a good way to keep cash flowing in


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your business. Make sure your invoices include payment terms and a deadline for payment. Once you’ve issued your invoices, keep track of when they are due. Don’t let them go delinquent. If the due date hits and you haven’t received payment, get on the phone and find out why. This should be fairly easy with smaller businesses. Many of the late paying culprits are large businesses that have huge accounting departments and require an elaborate process to cut a check. If that’s the case with you, find out who is responsible for getting the paperwork moving for your payments and turn them into a friend. Having a good relationship will take you a long way when trying to get your money faster. It’s important to remember that as invoices age, the likelihood of their getting paid is lower. Don’t allow your invoices to get old. Consider offering a discount to fast paying customers. If your invoices normally carry a 30-day payment window, offer them a discount of 1 to 10 percent for paying within 10 days. This is a win-win for both you and your customer. You get your money faster and they save a bit in the process. Accept Credit Cards “May I put that on your credit card for you?” should become a common question in your business. The good news about accepting credit cards is you get your money fast. From the time of processing to deposit in your bank it takes about two days. Also, you’ll save a ton of time and money by not issuing invoices and chasing payments. To accept credit cards in your business, you need a merchant account and a payment processor. The best place to start looking is at your bank. Ask if they offer these services and if not, whom they can refer you to. Accepting credit cards comes with various fees. Your merchant account provider, payment processor, and the credit card companies will all take a certain percentage of each sale you process. Rates vary by provider, so make sure you shop around. Internet payment processor PayPal at


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paypal.com may be an option for you, too. You’re not required to have a merchant account or payment processor to accept payments through PayPal. You simply need to set up a business account and get it verified. It’s a pretty simple process. PayPal charges a flat percentage fee of your sale for their processing.

CHANGE YOUR CASH OUTFLOW PROCESSES Once you’ve squeezed all you can out of your incoming cash processes, you should take a look at what’s going out of your business. Bill Paying Arrangements If you have vendors to pay each month, talk with them about payment terms. You can approach this in a few different ways.

1. If you need to stretch out your payment terms, ask if they would consider changing from a 30-day window to 45 days. Often just having a few more days to pay a bill will help you smooth out the cash flow. 2. Set up a quarterly payment schedule. Rather than having to pay your bill every month, ask if they would consider a different type of payment schedule. That way you can fit the payment into your cash flow budget when it works better with your cash inflows. 3. Ask for a discount. If you have the ability to pay your bills before the due date, consider asking for a 1 to 10 percent discount. This is the same type of win-win as it is on that accounts receivable process. Most companies will work with you on payment terms. They want to get paid too. Knowing that a different schedule will guarantee that they will get their money serves both of you well.


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Practice Inventory Control If your business requires having stock on hand to service your customers, make sure what you have makes sense for your business. “Keep a minimum inventory,” says accountant Dudleigh Gillett. “You should be turning your inventory over regularly in relation to the amount of traffic you have in your business. The maximum turn time is six months and your optimum should be two months. More inventory requires a larger storage facility, which increases many of your overhead costs.” If your inventory is collecting dust, you have too much. Tracking your inventory can be accomplished manually, using a spreadsheet or using your accounting software if it has that option. If you have a lot of products to track, take some time to automate the process by using software to make the task easier for you. If your accounting software has an option to track inventory, that will integrate well with your financial reports with little extra effort on your part. The key to tracking your inventory successfully is knowing what’s on hand at any given time, how many you have ordered, your minimum reorder level so you don’t run out, and how far in advance the item must be ordered to keep your inventory up-to-date. Sarah runs an online store that sells jewelry. She maintains a small amount of inventory in stock so she can keep her “Ship in 24 Hours” commitment to her customer. Based on her sales history, she has set levels of inventory for each item she sells. Her inventory tracking report looks like Table 7.1. Sarah’s bestseller is Mom’s Best Gift Necklace so she keeps plenty of those in stock. She makes sure she always has at least 100 on hand since she sells about 50 per month and can get a reorder within 15 days. She also has some products that don’t move as well like Sissy’s Gold Bracelet. She keeps a smaller quantity in stock, and lets the minimum get pretty low.


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Table 7.1

Item #

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Inventory Tracking

Item Description

MBG102 Mom’s Best Gift Necklace SGB112 Sissy’s Gold Bracelet CGB122 Charms Galore Bracelet

Ordering Lead Quantity Quantity Reorder Minimum Time In Stock On Order Level On Hand (Days) 178

0

125

100

15

25

0

10

5

30

28

50

30

20

30

Making The Most of Your Employees One of the worst habits small business owners acquire is thinking that throwing people at a problem will solve it. If you increase your work force, you’ve increased your salary overhead—more than likely the biggest chunk of your cash outflow. “Wouldn’t it be crazy if it took three people to make one pizza pie?” says Dee Newman, a small business operations manager. “You need to make sure you are making full use out of the people in your organization first. Look at how you can adjust the work responsibilities. Is one person sitting around while everyone else is busy? A small business can’t afford that.” She’s right. Before you add staff, take a look at your business processes. Can the additional responsibility be added to current staff jobs? Can the tasks be separated out and small pieces assigned to different people? Think process, not people. People can come and go in your business and your processes will work effectively as long as you have key inputs, actions, and outputs documented. This helps your business run smoothly along no matter who is at the helm. Create your processes and identify their dependencies within your business system. Teach your people to run the system. This makes you less vulnerable to major changes in your business. Tran-


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sitioning to new staff will be like crossing speed bumps rather than mountains. Consider Outsourcing There are several companies, consultants, and independent professionals available to do just about anything you need done in your business. It may be less expensive to contract the work out than to hire an employee. Rates for contractors vary dramatically based on the work but may still be cheaper than paying a salary and the taxes and benefits that go along with it. Whether someone who works for you is an employee or an independent contractor is an important question. The answer determines your liability to pay and withhold federal income tax, Social Security, and Medicare taxes, and federal unemployment tax. But you want to use caution here. You can’t just arbitrarily decide someone who works for you is a contractor instead of an employee to avoid paying the necessary liabilities. Make sure you’ve classified the work in the proper manner. According to the Internal Revenue Service (IRS), someone who performs services for you is your employee if you can control what will be done and how it will be done. The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These facts fall into three main categories:* Behavioral Control. Facts that show whether the business has a right to direct and control, include:

1. Instructions—an employee is generally told: • When, where, and how to work. • What tools or equipment to use.

*Source: IRS http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html.


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• • • •

What workers to hire or to assist with the work. Where to purchase supplies and services. What work must be performed by a specified individual. What order or sequence to follow.

2. Training—an employee may be trained to perform services in a particular manner. Financial Control. Facts that show whether the business has a right to control the business aspects of the worker’s job include: • The extent to which the worker has unreimbursed expenses. • The extent of the worker’s investment. • The extent to which the worker makes services available to the relevant market. • How the business pays the worker. • The extent to which the worker can realize a profit or loss. Type of Relationship. Facts that show the type of relationship include: • Written contracts describing the relationship the parties intended to create. • Whether the worker is provided with employee-type benefits. • The permanency of the relationship. • How integral the services are to the principal activity. If you’re not sure whether the person doing the work is an employee or a contractor, you can ask the IRS to evaluate it for you by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which is included in Chapter 9. Your best bet is to work with your accountant when filling out this form.


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Moderate Your Compensation You should reap the rewards of your business, but you will want to use caution, too. Work with your accountant to determine just the right amount of salary you can collect from your company without breaking the bank. Don’t forget about leaving some working capital available, too. Spending every dime of profit that comes from your business is not a wise decision. Your ownership withdrawals should be minimized to keep the cash flowing in your business. Make sure you are leveraging your cash flow budget to determine the right time to withdraw cash from the business.

WATCH YOUR COST CENTERS Two of the hugest chunks of your expenses can come from two different cost centers: your human resources (salaries and benefits) and tax payments. When you’re looking to reduce your expenses, these two areas are good places to begin your search. Human Resources If you have employees, you know that salaries and the associated benefits along with your tax obligations for those employees can take quite a bite out of your profits. Restructure Salaries. When cash is really tight, take a look at whether you have the right salary structure in place. Are you paying commissions? Would it be better to pay a flat salary plus bonus? Are employees paid hourly? Are overtime costs through the roof? Would it make sense to adjust your processes or outsource some of the work to decrease overtime cost? What about reducing salaries? Would employees be willing to accept less compensation to keep their jobs?


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Lay Off Staff. This should be a last resort option. What you don’t want to do is lay off staff and be unable to take care of the needs of your customers. Look at your situation carefully. Also think about the impact to workers who are left behind after a layoff. Although not often communicated, morale and productivity can suffer. Reduce Benefits. If you offer healthcare benefits, you’ve probably struggled with reducing them more than once. With a typical doubledigit increase every year, the cost of healthcare has gone way out of reach of some small business owners. • Work with your healthcare provider to see if there are different plan options that can reduce your costs. Shop around for other healthcare providers. • Check to see if professional employer organizations (PEOs) are allowed in your state. PEOs are also known as employee leasing companies and can work with you to reduce your costs. Because they are recognized as a large employer, they may have the benefit of better negotiations with service providers. If this option works for you, you’ll reduce administrative costs, too. • Check to see if your chamber of commerce or professional organization has a healthcare option that is calculated on group rates. Larger pools of employers often have better choices. • Consider shifting some of the cost burden to employees. Most employees have no idea what their healthcare costs their employer and when educated can make better choices. Taxes Taxes can be a huge burden for small business owners. But taxes are not a bad thing. If you are paying taxes, that means you probably made a profit from your business and that’s a good thing. Never avoid paying taxes. Every day there are announcements in the newspaper about tax


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liens filed against businesses because they haven’t paid those obligations. Don’t let that be you. The key with taxes is to make sure you pay your obligations and to make sure you take the deductions you deserve. Your best bet is to work with a knowledgeable accountant to determine your tax strategy.

ADJUST YOUR OPERATIONS PROCESSES You can find plenty of hidden cash by taking a hard look at your operations processes. That’s everything from the organizational chart to how work gets done. If you’re a company of one, you’re probably laughing right now because every single bit of this lies on your shoulders. That’s true for now. But if you’re planning for business growth, there’s no better time to take a look at your business processes and see if they’re being done in the most efficient way. On top of that, if you outsource or hire you’ll have a leg up on your competition by having all your operations running as smoothly as a well-oiled machine. How is Your Organization Structured? Are you using the most efficient organization structure for getting work done? Perhaps your organizational structure was developed quite some time ago and has outlived its usefulness. It’s time to take a look at it to see if it’s functioning in the most efficient manner to positively impact your bottom line. If you don’t have an organization chart, a sample is included in Chapter 9. What do you need to do? Define every single role in your organization from customer greeter to president. You don’t have to put all of these roles on your organizational chart for now, but make sure you have them written down. Next, you’ll want to take each of these roles and define what they do. This is not a job description. Just include a brief identification of the major responsibilities of the role.


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Get everyone on board with this and you can knock it out in a day or two. Don’t assign this work to just one person. It’s too big a job and will take a while to do. Document Your Business Processes Your company is full of business processes, some carried out every day and others completed infrequently. It’s important to document how work gets done in your company so you can ensure you aren’t wasting money. If you already have your processes documented, conduct a review process on every single one to make sure all steps are still necessary. Make any adjustments as needed. Processes include things like opening your business for the day, taking a sales order, delivering your product or service to the customer, billing the customer, collecting on a sale, providing customer support, and closing the business for the day, to name a few. Even tiny companies have many processes. You want to make sure you identify every single one. One small business owner learned a hard lesson about business processes and who should be involved in each process. He’d been in business for 20 years. For the first 15 years his business had been profitable and managed good cash flow every single month. Then he decided to take a vacation as a reward for his years of hard work, so he left for a month and went to Europe. He didn’t worry about the business based on its past history. But he should have. When he returned, the business had lost money and had the first deficit cash flow month ever. He could not believe it. When he investigated the cause, he discovered that he was so intertwined in each of his business operations processes that without him there, they came to a screeching halt. Needless to say, he refined his operations processes quickly and has never had a cash flow problem since.


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One of the best ways to identify processes is to walk through a day in your company from start to finish. As you encounter new processes, jot down the names of them on a sheet of paper with a brief description. Your sheet might look something like this:

1. Open the business—steps taken by the first person to arrive every 2. 3. 4. 5. 6.

day. New customer order—what to do when a brand new customer orders from us. Existing customer order—what to do when an existing customer places an order. Customer return—how to handle a customer returning a product. Customer support—what steps to take to provide support. Close the business—steps taken by the last person to leave for the day.

Next, you want to document the steps of each process. The easiest way to do that is by asking a series of “then what?” questions from the beginning until you get to the completion of the process. Often it’s easier to have two people do this—one who has the main responsibility for documenting and the other who does the questioning. You’ll have to decide what works best for you. Take what you’ve discovered and create a sheet of process steps for each process. If we were defining the steps of the opening process, they might look like this:

1. 2. 3. 4. 5. 6.

Unlock the door. Turn off alarm. Turn on fax machine. Check voice mail for messages. Distribute voice mail messages to appropriate department/person. Check general e-mail account; respond.


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Interesting that such a simple task has six different steps, isn’t it? That’s the enlightening part about making sure your operations processes are documented. It helps you see exactly what’s being done so you can make sure it’s happening in the most cost-effective manner. Inefficient operations processes can drain money from your business quickly. It’s the little things that people forget. An accountant was having a problem with his burglar alarm. Part of the close procedure in his business was that the last person out was responsible for setting the alarm. Yet every day for a week, when he arrived at his office in the morning, the alarm had not been set. He questioned his staff and the “late leaver” confirmed that he was indeed setting the alarm every day. The accountant was to the point of frustration and was ready to call in the alarm company. Surely the darned thing was broken. That day, he and his staff went to lunch together. As they left the office, the accountant closed the door and pressed the “arm” button on the alarm. His employee exclaimed, “Oh! Is that how you’re supposed to do it? I’ve been pressing arm and then closing the door.” Mystery solved. If something is not going quite right in your business and an employee is performing the function, don’t assume they’re doing the task properly. You can question without accusing to determine if there is a process problem. Or, better yet, document the procedure on a checklist to ensure the steps are done correctly. This situation didn’t cost the company money, but it could have. What if thieves had found the door unarmed and had broken in? That could have been devastating. Once you have all your processes documented, go through them with a fine-tooth comb. You want to be on the lookout for tasks that are duplicated, steps that seem out of sequence or unnecessary. These are


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the places you’ll be able to save cash in your business by making your employees more efficient. Don’t forget as you go through each process that just because you’ve always done something a specific way means it’s the best way to do it. Adjust as necessary.

TAP INTO WHAT EMPLOYEES KNOW Your employees have their fingers on the pulse of what is happening in your business. Make sure you have an open communication channel with them that allows for regular feedback about what’s going right and what’s not. A simple 30-minute meeting each week can reveal a good bit of information. If cash flow has become a major issue for your company, share as much as you feel comfortable with them. They’ll often come up with great solutions. Don’t try to go it alone; their future is at stake, too. You may want to conduct an employee survey every 6 to 12 months to get a feel for their overall impression of your company. It doesn’t have to be a complicated process. Ask questions about all areas of the business and how it’s working. It can tell you a lot about your business and where you should be focusing your effort. Twenty-one simple questions are listed next. You can also find a formatted Simple Organizational Assessment in Chapter 9.

1. I feel encouraged to come up with new and better ways of doing 2. 3. 4. 5.

things. When I do a good job, my accomplishments are recognized. I have the freedom to make decisions to get the job done. My company provides opportunities for professional development that improve my job performance. Sharing ideas and working together to get things done is encouraged across all departments.


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6. My company respects employees of different ages, races, genders, cultures, religions, and ethnic backgrounds.

7. I understand the criteria that will be used to evaluate my per8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

formance. My company provides the flexibility needed to balance the demands of work and personal life. My company creates an environment where work is enjoyable. In my company, we believe it is important to learn from both successes and failures. Information in this company is openly shared among employees. I understand how my position supports the company’s direction. I have enough information to communicate the company’s goals and direction to others. I have a good understanding of this company’s business direction. The people I work with cooperate to get the job done. I feel valued as an employee of this company. My job is meaningful and makes good use of my skills and abilities. My company regularly provides me with training and tools to help me perform my job. People in this company are doing the right things to improve quality. My company rewards and recognizes successful team effort. In this company, employees are rewarded according to their skills and contributions to organizational success.

CASHING IN ON CUSTOMER LOYALTY More than 90 percent of small business owners are letting money walk out the door of their businesses each and every day. Small businesses work hard to acquire new customers, yet most of them are


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missing an untapped source of sales that exists at their company. Are you one of them? Studies have shown that it’s easier to sell a customer the second, third, or fifteenth time than it is to sell them the first. And with each sale, your costs go down. You don’t have to work so hard. When I ask small business owners what action they are taking to keep in touch with current customers, the answer is normally, “We don’t.” You’re missing a gold mine of opportunities to make easier sales and create a loyal following of customers that will return time and again if you don’t use your existing customer base to grow your sales. Customer loyalty is not rocket science. The good news? You already know the required ingredients. All you need to do is put the pieces together so you can leverage your existing customers and skyrocket your sales. How would you feel if you pulled into a gas station and before you could get out of your car to pump gas, a smiling person appeared at your door and cheerfully asked, “Fill ’er up?” While the gas is pumping, this helpful person proceeds to scrub the bugs off your windshield and asks you to pop the hood so he can check the oil for you. Wow! You sit there amazed and delighted that this business considered you to be so special they would provide such great service to you. You sure didn’t expect this to happen. As a matter of fact, you put off buying gas until the very last moment because you detest getting out to pump it yourself. You’ve found a winner and you’ll return time and again. What happened? You expected one thing when you pulled into the station and another quite different experience occurred. Your expectations were exceeded. Creating loyal customers is simple—meet or exceed their expectations. You can find out a lot from your customers by asking what their pet peeves are when it comes to doing business with you. Here are a few


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complaints I hear over and over again from customers trying to do business with others. • • • • • • • • •

Not following through. Excuses. Long wait times. Passing the buck. Lack of courtesy. Indifference in attitude. Not connecting with a human being. No greeting/not friendly. Never return phone calls.

You aren’t guilty of committing any of these in your business— are you? Customer satisfaction levels with most businesses are pretty low. The good news? It doesn’t require a ton of effort to raise the bar. Know How Much Your Customer Costs Do you know how much it costs you to acquire a new customer? You should. Add your tangible (printing, ad costs, etc.) and intangible marketing expenses to determine the total cost, then divide it by the number of new customers you acquired. You want to make sure that your customer acquisition costs aren’t more than the return you will get back from that customer. You do that by comparing your customer acquisition costs with the lifetime value of your customer. You’ve decided to run a marketing promotion to get some new customers coming in the door. You decide you’ll do a print ad in your chamber newsletter for six months. The goal of your ad is to get people to go to your web site and sign up for your newsletter. The newsletter ad costs $150 per month. You pay a marketing consultant $200 to create the ad for you. The ad runs for six months and you end up with 100


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Cashing in on Customer Loyalty Table 7.2

Cost to Acquire a Customer

Marketing Consultant

$ 200

Ad Cost

$ 900 Total Cost

$1,100

Total Customers Cost per Customer

100 $

11

people on your newsletter list. How much did it cost to acquire each of those sign ups? Your cost to acquire each customer based on this promotion is $11 per customer. The calculation is Total Cost ÷ Total Customers = Cost per Customer. (See Table 7.2.) If each customer has a lifetime value of more than $11, you’re headed in the right direction. Creating Customer Loyalty Selling to your existing customers can give your bottom line a big boost. You don’t have to work as hard to sell an existing customer as you do to sell a brand new one. If you had 100 customers who typically made a purchase for $1,000, you’d have $100,000 in sales. If five of those customers (five percent) were loyal customers who made additional purchases amounting to $12,000 each in any given year, you’d have $60,000 more in sales (60%)—with a lot less effort than it would take to acquire 60 new customers who each buy $1,000 of your products or services. Your customer acquisition cost goes down, too. There are three keys to creating customer loyalty.

1. Know who your customers are. 2. Know what your customers are worth. 3. Take action.


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If I purchased from you once and never came back, would you know? Would you care? Some companies are great at that initial sale, and then they fall flat when it comes to retaining the customers they worked so hard to get. Waiting for an appointment at a local hair salon, I smiled as I overheard the owner on an incoming call. He said, “Sure, we’d be happy to help you. Can you tell me how you found us?” As I sat in his chair, I asked him about the call. He’s adamant about knowing how his customers find him. “I always ask new customers that question. I have to know how customers are finding us so I can tell what’s working,” he said. You should know, too. But you need to take it a step further. He and I talked about a lot of things while I was sitting in that chair—and they all meant future business for him. He missed the boat. I walked out of his salon that day and he doesn’t have any idea who I am, how to contact me, or whether I’ll really be back. Oops. Key #1: Know Who They Are. Do you? Compile and maintain a list of your customers. Track their habits. Monitor your list so you know when they are doing business with you differently. So what kind of information do you need to create a good customer loyalty program? You need to collect and track five critical pieces of information.

1. Collect contact information. You need name, address, and e-mail. Make sure you ask permission to send them e-mail when you collect the address. 2. How much do they spend? Each time your customer makes a purchase, you should document the amount they spent. 3. How often do they buy? We are creatures of habit. (I bet you take the exact same route to the grocery store each and every time.) Changes in behavior stick out like a sore thumb. If I normally buy


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from you once a month and all of a sudden it’s been six weeks since I’ve made a purchase, you need to find out why. 4. What do they buy? Customer’s purchases can give you big clues into their interests, wants, and needs. It can give you a starting point when you develop a new product or service, too. And knowing what they’ve purchased in the past will save you tons of embarrassment— you won’t try to sell them what they already have. 5. What do they want? Who cares? You should. Asking what your customers want can help you determine what future products or services to offer. People’s needs change over time. When they no longer need the exact item you sell, you want to be able to accommodate them in a different way. A small restaurant wanted to grow their catering business. I suggested they approach existing customers for both additional business and referrals. I was thrilled when they told me they kept track of their catering customers, so I asked for that information. Imagine my surprise when they handed me three six-inch stacks of invoices (in date order) and a calendar. This is not the way to track your customers. If all you have are stacks of paper, the time to start creating order out of chaos is now. If you’re overwhelmed with the task, hire someone to do it for you. Often, you can find a high school student who will accomplish this for a small fee. If you decide to do it yourself, tackle a few a week until you’ve finished. If you don’t think it’s worth it to enter all of your customers into a tracking list, just enter the most valuable. Remember the 80/20 rule—80 percent of your business comes from 20 percent of your customers. Find out who those 20 percent are and begin tracking them. A Customer Tracking Form is included in Chapter 9. If you have a good contact management software program, that would work well, too.


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Key #2: Know What They’re Worth. Remember the five-dollar customer? Take the time to calculate the long-term value of your customers. Key #3: Take Action. Your customers are busy people. They need to be reminded that you exist and how you can eliminate their pain (wants or needs). Have you ever received mail from a company and decided to save it so you could check them out later? Then you find that piece of mail in your To Do stack months later and realize you never contacted them. Your customers do that, too. Your success is dependent upon consistent contact with your customer. Set up a standard system that will keep your business in the mind of your customer on a regular basis. At a minimum, your contact intervals with your customers should be 30 days/60 days/6 months/ 12 months. Your contact system should include standard reasons why you contact your customer and how that contact will be made. Don’t just send them messages when you want them to buy something. Remember, your customers are people, not just someone you want to sell your product or services to. Connecting with them on the personal level will help them recognize how much your company values the relationship and will create long-term loyalty. Create an action plan that defines what you will do each month to keep in touch with your customers. This is the most critical step. None of the other activities will matter if you don’t act on this one. Take a look at the sample Customer Contact Action Plan in Chapter 9. Your action plan should have similar entries. What Are Your Company’s “Whys”? Determine in advance the reasons why you will contact your customer. I’ve listed 10 of them here, but this is by no means a complete list. Take a few minutes to brain-


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storm what would work best for your customers. And remember, the best way to find out what would work for them is to ask. Why #1: Thank-you How many thank-you notes or cards have you received from companies you’ve done business with? If you’re like most people, your answer is either “I’ve never received a thankyou” or “Not many.” That’s why sending a thank-you note to your customers is so powerful. Most businesses don’t do it. Your company will stand out from the crowd. Send a thank-you note within a week of the sale (or a month at the maximum). Two things to remember when you send your notes:

1. Your note should be hand addressed. Don’t stick a label on it. 2. Use a regular stamp, not a postage meter. Why #2: Services That Match Remember when I said you should ask customers what they want? The reason is so that you can contact them with other products or service offers that match those wants. Why #3: Thinking of You Wouldn’t you be surprised to get a note from someone you’ve done business with who sends this message? This is another of those rarely acted upon tactics that can gain you much loyalty from your customers. It sends the message that you not only care about their business, but also care about them as a person. Remember, people do business with other people, not businesses. Why #4: Referral Thank-You When someone refers you business, thank them. They have taken a risk with someone they trust in referring business to you. And they’ve created an opportunity to put money into your pocket. Some business owners choose to send along a special thank-you gift also. You’ll have to decide if sending a gift is a good fit for your business. The key issue here is to acknowledge the referral in some way. Rewarding good behavior typically causes more of that type of behavior. Why #5: Special Occasions There are hundreds of special occasions each year. Find one that fits your company and use it as a reason


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to contact your customers. Get creative. You can start by looking at the standard government holidays and special days. How could you leverage Valentine’s Day to promote your business? What about Labor Day? You can also check out a copy of Chase’s Calendar of Events (available at bookstores and libraries) to get additional ideas or check them out online at www.chases.com. You can always create your own special occasion. Why #6: Saw You in the News Always read (or at least skim) the newspapers—dailies and weeklies—in your area. You’d be surprised at how many times you can find your customers in there. Cut out the article and send it to them with a short congratulatory note. Why #7: Special Offers Can you give your customers a unique offer for being loyal? How about a two-for-one special? Don’t make the mistake that many businesses do. Many times I’ve received special offers from companies I do business with that contain a special note that the offer is valid for “new customers only.” If you use this type of tactic, it will alienate your current clients. The question they will ask themselves is, “What about me? Am I not important?” You know from computing your customer value that they are important. You also know that you can increase their value by turning them into a loyal customer. Why #8: Regular Maintenance Do you sell a product or service that requires regular maintenance? A good way to keep in touch with your customers is to celebrate the anniversary of the item: Happy Birthday! Your refrigerator is one year old today or Happy Birthday! We serviced your equipment one year ago today! This strategy worked very well for a well-known car manufacturer. How can you put a spin on it to make it work for you? Why #9: Contests People love contests. Create a contest for your customers to win some of your products or services. Or create a contest with a coupon attached that will bring them into your store. You can tie a contest to a survey to generate better response.


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Why #10: Surveys Asking your customers what they want or how they feel about your products or service can tell you a lot about where your business needs to go. A survey doesn’t have to be a long-drawn-out questionnaire; it can be a single question. The keys to success with your survey are to determine what you want to know, make the response easy for your customer, and use the information you received to make a change. Take a look at More about Surveys in Chapter 9 to structure your survey just the right way. Also included is a Sample Survey/Feedback form you can use. What Methods Should You Use to Stay in Touch? You can contact your customer by phone, mail, e-mail or face-to-face. You should use a variety of all four. All have advantages and disadvantages. Some are more costly than others, but a mix of contact methods is critical to your success. Remember that you should also ask your customers how they prefer to be contacted, and you can capture this information on your contact list. Phone contact—There’s nothing like hearing another person’s voice. Personal contact will take you a long way in your connections with your customers. The downside is that with all of the technology available, you may become a victim of voice mail tag (leaving messages back and forth with your customer), and that defeats the purpose of the contact. Also remember that your customers are busy people, too, and they may just not have the time to talk with you. Keep your call short, but make it count. Mail—Use regular mail for general contact with your customers. Make sure your mail doesn’t look like junk mail. You don’t want it tossed into the trash. It should be identifiable; your customers should know it’s from you. The downside of regular mail is that it can get expensive. Make sure your budget can accommodate this expense. A simple example of a thank-you postcard is included in Chapter 9 in addition to a sample letter to reactivate any lapsed customers.


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E-mail—The least costly way to keep in touch with customers. But make sure you have permission first. Your key to successful e-mail communication is to create a compelling subject line and to keep your message short and to the point. Don’t clutter up your customers’ e-mail boxes. This will produce the opposite effect. One of the best things about e-mail is that it can be forwarded to an untold number of people very easily, and one of the worst things about e-mail is that it can be forwarded to an untold number of people very easily. Be wise. Make sure every e-mail you send represents you in the way you want it to. Encourage people to forward your e-mail to others who may be interested in what you have to offer. Face-to-Face—Sometimes, meeting someone in person is the best. Your time is your most expensive commodity, so choose carefully for this option. Easy Ways to Keep in Touch Newsletters—One of the best ways to keep in touch with current customers is by regularly sending out a newsletter. You can use both e-mail and regular mail. Set up a regular schedule for your e-mail newsletter—daily, weekly, monthly—and stick to it. I used to send a monthly newsletter and then realized that it wasn’t often enough, so I changed to a weekly newsletter. The weekly format is much shorter than the monthly version out of respect for my clients’ time. I also send a newsletter via regular mail a couple of times a year. Your newsletter should not be just a sales pitch. It should be newsy and helpful, sprinkled with your service offerings throughout. Postcards—I am totally sold on postcards for keeping in touch with customers. Why? They’re easy to create and much less costly to mail. They’re easy for your customer because what they see is what they get. There’s nothing to open. There are guidelines for postcards, so make sure you check out the postal requirements first at usps.com.


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Your Customer Service Counts, Too Your customer loyalty system won’t mean a thing if your customer service stinks. The two go hand in hand. Your customer service starts on the inside. Decide what is important and make sure you communicate your expectations to your staff. If it’s important to you that your phone is answered by the second ring, make sure they know that. If it’s important that they project a certain image, make sure they know that, too. Most employees want to do a good job. They need to know how to meet your expectations. They can’t do that if everything is in your head. And don’t forget, unhappy employees equal unhappy customers. If there’s an issue with one of your employees, fix it. You can bet that it’s showing in how they deal with your customers. Appearances matter, too. Make sure the people and environment match your image. A friend of mine had been using a specific dry cleaner for her professional clothing for quite some time. Then the dry cleaners changed ownership. The new owners were nice enough, but were normally dressed in t-shirts and sweat pants—a generally unkempt appearance. My friend took her business elsewhere. Why? The appearance of the new owners made her wonder just how careful they’d be at getting her clothes crisp and clean. If you really want to know how your business performs, have someone do some mystery shopping at your company. What’s mystery shopping? It’s when someone visits your business unknown and unannounced and acts like a customer. Determine what your objective for the mystery shop is before it happens. Decide what you want to know. Define a set of questions you’d like answered, such as: • • • •

Were you greeted promptly? What was the atmosphere of the business? Was the salesperson helpful? Too helpful? Was the environment clean? Did it match the image I’m trying to project?


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Table 7.3 Mystery Shopper’s Report Store Assessment Your store is a clean and friendly place. Your location is a major downside because it is so difficult to get in and out of the center. Inside the store, busy lunchtime traffic patterns and less than pleasant placement of tables present an image different from what you have indicated you want people to perceive. Recommended Action • Reroute the traffic pattern. Customers are grouped together in one section all trying to order, pay, and pick up. Create a traffic flow that works with your current setup. • Use your deli cases as a billboard. Get professionally created signs that promo special offers and catering services. • Include a catering menu with every to go order. • Schedule bathroom checks just prior to and after lunch. Clean and pick up as needed. • Ensure that the dining room tables are cleaned promptly. • Provide an area for customers to return plates and trash. • Regularly clean the door to the kitchen that is exposed to your customers. • Remember to look up, down, and into the corners—your customers do. • Change the sequence of your payment process. Have the customer order, pay, and then pick up rather than order, pick up, and then pay. • When breakfast is over, remove breakfast item baskets from counter. • Consider selling all “add ons” displayed in your baskets at a single price and offer a “two for” deal. Consider consolidating all items in one basket. Menu • Your current menu features many wonderful and varied items. The problem with this is that it overwhelms your store customer. People don’t have 15 minutes to read your menu, so it appears as though they order easy items. Recommended Action • Focus the menu on your core specialty items—Italian entrees, parmigiana, and bombers. On your print menu, the items that get you the highest margin (bombers and parmigiana sandwiches) are buried. Give them prime space. • Consider the possibility of offering your customers a junior size of your specialty, parmigiana, and bomber sandwiches.


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Table 7.3 (Continued) • Consider purchasing smaller portions of chips and including them with sandwiches. • Consider offering fries with any sandwich at less than the single fry order price (e.g., “Add fries to any sandwich order for just $1!”). • Align pricing. Price endings should be consistent. Yours are varied. Consider ending everything with a 0 or 5. Get rid of those ending in 9. • Look at your menu from your customers’ perspective. They could ask these questions: Why does a sandwich cost more than an entrée? What’s the value to me as a customer? It really doesn’t matter to your customer how much it costs you to make a sandwich. Their perception of value will cause them to buy time and again. • Remove noncore items from store menu. Consider offering them as a Special of the Day item rather than something that dilutes your regular menu.

A word of caution. Be prepared for some frank feedback from your mystery shopper. Be ready to make some changes based on the feedback you receive. The owner of a small deli needed some feedback on both his restaurant’s look and feel and the menu offered. Every day he saw customers starting to come into his business for a bite to eat and then leave without purchasing anything. He knew he needed an outsider’s eye to see what he wasn’t seeing. His mystery shopper’s report is in Table 7.3. Get Started See, I told you creating loyal customers wasn’t rocket science. If you take consistent action, you can reap the rewards, too! Here’s what you need to do now.

1. Gather all of your customer contact records and any supporting information (e.g., calendars, schedules, etc.).


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2. Decide what method you will use to track your customers. Will you

3. 4. 5.

6.

7.

use paper, spreadsheet, contact management software, or come up with something unique? Make sure it is something that will be easy for you to manage on a regular basis. Decide what customer data you will track. Enter your customer data into your tracking form. Create your action plan. Determine what activities you will do on a consistent basis and add them to your plan. Create at least a 12month plan. Some activities can’t be planned (e.g., seeing your customer in the news), so keep in mind the impromptu activities at all times. Analyze your customers’ typical buying cycle. Determine how often they buy and what the length of time is between purchases. Any customer who doesn’t purchase within the typical time frame should be considered at risk. Follow your action plan to turn your customers into customers who stick and get the cash you deserve.


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s Marketing— Your Cash Generator


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Marketing is the lifeblood of your small business. Without marketing there are no sales. Without sales there is no cash. Without cash there is no business. Most small business owners take chances with the future of their business by using marketing techniques that waste money and time. You work hard to acquire new customers. Don’t make mistakes when it comes to marketing your business. When I ask small business owners what activities they’ve included in their marketing plan, I get the deer in the headlights look or a response that advertising doesn’t work for their business. Marketing does not equal advertising. There are numerous marketing strategies you can use to promote your small business and smooth out your cash flow:

1. Strategic alliance partnerships. 2. Joint ventures. 3. Writing and publishing.

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4. 5. 6. 7. 8. 9. 10.

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MARKETING—YOUR CASH GENERATOR

Speaking engagements. Online networking. Face-to-face networking. Business web site. E-mail marketing. Referral marketing. Affiliate marketing.

You’re missing a wealth of opportunities to make easier sales and create a loyal following of customers who will return time and again if you miss taking advantage of key tools and strategies. Sometimes you have to take a risk. A calculated risk. That’s what business strategist J.P. Maroney helped one of his clients do. There wasn’t much choice. The client, a jewelry store, was coming into the holiday season on the short end of its cash flow. Something had to be done. So Maroney masterminded a promotion that had the potential to create the best season ever. Maroney’s approach was to contact all business owners in his client’s local area and offer each business owner free $50 gift certificates for every employee on their payroll. What enterprising business owner would turn down an opportunity to provide a gift for their employees at holiday time that didn’t cost a single penny? Not many. As a matter of fact, several took him up on the offer and they handed out almost 4,000 gift certificates. Was he nuts? Absolutely not. You see, Maroney had done his homework. “People were puzzled at how this store could afford to make this offer,” Maroney said. “In fact, many were skeptical, because it sounded too good to be true. But it’s really simple. We examined three key areas of his business. The lifetime value of a customer, the dollar amounts of his average sales transaction, and his profit margins. We then determined that the promotion would pay off above and beyond the risks.”


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If you know your financial numbers, it gives you a greater opportunity to leverage your marketing activities to improve your bottom line. Here’s what Maroney knew. The average sale for his client’s business was $200. The average lifetime value of each customer was $2,500. The cost for running the promotion was $17 per customer. Was it worth it? You bet. On top of that, now this business owner has thousands more customers on his contact list whom he can market to again and again. They’ll return and more than likely bring more business with them, too. This boosted the business much more than the bottom line. In the eyes of the business owners who got the certificates, he was a helper. Using the approach of helping others always has the potential for coming back to you in even greater numbers. From the employees’ perspective, getting a gift certificate from their boss for a local business gave that business instant credibility. You can’t buy that.

MARKETING IS A FULL-TIME JOB If you aren’t spending at least 50 percent of your time marketing your business, you could be on the road to disaster. If you’re wasting time and money doing your marketing the wrong way, the same thing could happen. Fatal Marketing Mistakes Most Business Owners Make Not Targeting Your Marketing Efforts. You can’t be everything to everyone, and your marketing message won’t be effective if it’s diluted by trying to reach more than one target. Take the time to truly define who you are targeting and you will reap the success of those efforts.


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Not Knowing Who Your Prospect Really Is. Your prospect is not “anyone.” You must take the time to define, specifically, who it is you are after. The more you know, the more successful you will be. Not Knowing What Problems Your Prospects Want You to Solve. They don’t care about the features of what you have to offer. They care about what you can do for them. What issues or problems keep your prospects awake at night? Solve those and you’re on your way. Marketing Inconsistently. You can’t market one month, then wait three months and market again. Your marketing efforts need to be consistent over time and be provided through several different mediums. Thinking Your Company Name or Logo Is the Most Important Component of Your Marketing Message. They aren’t. They are actually the least important part of your message. Your prospects care about how you can help them. Not Tracking and Measuring Marketing Results. You must track and measure so you can repeat what works. Not Testing Your Marketing Materials. A good way to waste a lot of money is to market using an untested message. If you have money to throw away, don’t test. Thinking You Can Market Like the Corporate Giants. The big guys can just throw their name around and it brings them business. You have to prove it. Thinking All Mail Is Junk Mail. Start really looking at the direct mail you receive now. It will provide you with a wealth of learning opportunities and ideas for your own marketing efforts.


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Not Creating an In-House List. An in-house list is a list of your current clients and prospects. You should be collecting name, company, address, phone, fax, e-mail address, and any other details the person is willing to provide. Focusing on Features Not Benefits. Your prospects don’t care if your products or services have the fanciest features around. It’s the benefits—what will solve their problems—that will make them take action. Not Asking Your Prospects to Take Action. You can market with all the hoopla possible, but if you don’t tell your prospects to take action, you won’t make any sales. Not Telling Your Prospects Exactly What Action to Take. It seems like a no-brainer, but it’s not. You must take them step-by-step through all of the actions they must take to accomplish what you want them to. Not Knowing the Long-Term Value of Your Customers. You should. They’re worth a whole lot more in the long run. Know the longterm value of your customers. Stopping What’s Working. You stop what’s not working, not what’s working. No matter how bored you are with it, if it works keep doing it. Not Having a Public Relations Strategy. At least once a month you should be sending out a press release to key contacts. That’s only 12 times a year. Not Seizing Free Publicity Opportunities. When you have an opportunity to be interviewed or provide comments from an expert’s viewpoint, don’t turn it down. Those contacts won’t ask again.


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MARKETING STRATEGIES AND TACTICS A variety of marketing strategies can work for pretty much any type of business. Find the ones that work for your business and keep doing them. Some will cost you more than others, some will be more effective than others. The key is to start, track, and measure whatever strategies and tactics you are using. Remember the restaurant mentioned in earlier chapters? The only marketing methods the owners were using were word of mouth and a daily fax blast to current customers. It just wasn’t enough to keep them afloat. They were reaching only a tiny percentage of their market and wanted to expand their catering services to increase their cash flow faster. They needed to reach out further into the community, connect with their target market, and get people to come to them. They needed a consistent marketing strategy and tactics to carry out. Here’s what their activities to achieve market expansion looked like: • Join at least one business/professional organization. Attend meetings. Get involved. • Contact office furniture suppliers. Suggest a catering promo flyer in each new or renewing customer package. • Contact area banks with promo for meeting catering services (office manager/VP). • Contact meeting and event planners to promote services. • Build special catering menus around holidays such as Father’s Day, Mother’s Day, Graduation, Fourth of July, Labor Day, Veterans Day, and so on. Notify all store patrons, strategic alliances, and current catering customers. • Consider sponsoring a Little League team for name recognition. • Participate in “Taste of . . .” events. • Promote on the Internet. • Place a fishbowl or basket on the counter to collect customer feedback forms. Incent customers to submit forms by giving away a free


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lunch a month. Set a specific day for the drawing such as the second Tuesday of each month. Keep track of who wins. Post winners in the store: “Our free lunch winners are (name, name, name). You could be next! Just fill out a comment card and place it in the fishbowl.” Create menu specials for the week and fax once a week rather than once a day to save planning time and give customers an idea of “when I want to eat there.” Each fax will include a note about catering. Get small business card size magnets that promote the catering service and stick on the company truck. Allow anyone to take them. Build relationships with food editors/journalists for local newspapers. Proactively seek reviews from newspaper and TV media. Create and submit at least one news release a month to targeted media. Create a Big Bomber card. Give to all customers. Buy 10 bombers, get one free. Mark card each time a bomber is purchased. Revise customer feedback form to include the following items: Fax—May we fax our special menus to you? Y/N E-mail—May we e-mail our special menus to you? Y/N May we use your comments in our promotional materials? Y/N

• Enter all catering customers and related order information into a database and use to track purchases, maintain contact, and provide ease of ordering for future orders. • Enter all customer feedback forms into a database. Use to promote special catering opportunities, to keep in touch, and to notify of weekly special menus. • Leverage current catering customers as a referral source by asking, “Whom do you know that could use our catering services?” • Use an incentive for catering customers to return such as a “5 for 10” promo. Place five catering orders, get $10 off your sixth order, or incent the customer by saving them the delivery fee such as “3 Is free.” Delivery of the third catering order incurs no delivery fee.


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Now you might be thinking that none of these would work for you because you don’t own a restaurant. Quite the contrary. Think bigger. No matter what industry you are in, you can find a way to spin a particular marketing strategy or tactic and make it work for you. Let’s take each of the categories and dig in a bit deeper. Strategic Alliance Partnership Strategic alliance partners are those businesses that serve the same target market you do, but offer different products. A fitness professional could partner with medical providers. A business consultant could partner with accountants. Your best bet is to brainstorm who would be the best strategic alliance partner for your type of business. To get you thinking in the right direction, take a look at the examples in Table 8.1. See how easy that is? Take some time to brainstorm your list of potential strategic alliance partners. Then put together an action plan to compile a list, and contact each resource. You may want to do an introductory letter prior to contacting them by phone. You’ll find an example of the Strategic Alliance Partner—Free Offer letter in Chapter 9. Joint Ventures Joint ventures are similar to strategic alliances in the aspect that you share your customer resources. This type of arrangement normally includes your business and one or more businesses that have similar audiences working together for a single purpose. The bottom line is about boosting each other’s businesses so everyone ends up being successful. One example of this would be a group of businesses getting together to buy a one-page ad in a magazine that featured every single business. Another example is coauthoring an e-book. A while back a writer wanted to create an e-book about networking effectively. She identified


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Table 8.1 Strategic Alliance Partners Mural Painter Focused on Children Interior Designers Model Home Designers Realtors Child Care Facilities Obstetrician/Gynecologist Children’s Furniture Stores Restaurant Catering Service Office Furniture Suppliers Banks Meeting and Event Planners Car Dealerships Business and Professional Organizations Fitness Professional Focused on Women Doctors Massage Therapists Physical Therapists Independent Women’s Clothing Consultants Independent Make-Up Consultants Wedding Consultants and Vendors Fitness Product Suppliers

all the experts in the subject and asked each of them to answer a structured set of questions. Then she took each person’s response and turned it into a chapter for her book and ended up with a complete guide to networking from a group of experts. She made this a win for each expert by providing them with a copy of the book and an opportunity to sell it and make a profit. What a win for everyone. You can make your joint ventures work for you, too. Think about your target audience and what they want. Rather than tackling the entire project yourself, brainstorm other resources and companies you know about. Approach them and make an offer.


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Writing and Publishing Writing for the publications your target market reads is a really good way to reach out to them and become a known entity in your industry. The first thing you need to do is make a list of publications your target market reads. Then you want to identify potential topics for the articles. You can take a look at the benefits you’ve already identified to get a good idea of what these should be. Your next step is to approach the publications for possible inclusion of your articles in their publication. Trade publications are the easiest to get into. Membership publications are always looking for material. Don’t expect to be paid for these submissions. Another great avenue for your articles is the Internet. Every single web site needs content to stay fresh to its visitors. That content might as well be your article. There are hundreds of article bank directories on the Internet where you can post your articles, and a publisher will pick them up and use them as web content or content for their e-mail newsletter. Make sure you take advantage of this option. The best place to start is EzineArticles.com. Here’s what one fitness trainer created for potential titles to write about: • • • • • • • •

Oh my aching back . . . 10 ways to banish that pain forever. Feel great, look great . . . at 88. The top five mistakes to avoid in your fitness program. Ten tips for busting the stress trap. Get healthy—virtually. Tune your body and tone your health. Strengthen your brain by strengthening your body. Couples who train together stay together.

You should always keep a running brainstorm list of potential topics. Listen to what your customers are saying and often you’ll find the title for your next article.


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Speaking Engagements You don’t have to be a professional speaker to go on the speaking circuit and get the word out about your business. You can use what I call the Rubber Chicken approach. During any given week, there are numerous organizations meeting who need a speaker to fill a time slot. That speaker should be you. Make a list of all the civic and community organizations in your area. Refine your list to those whose membership would include people who are in your target market. Approach each organization and get on their speaking schedule. Don’t think you have anything to talk about? You sure do. Take that list of articles and their content and turn it into a 10- to 15-minute talk. Piece of cake. You want to make sure your talk is all about your target market, not about you and what you have to sell. Using the benefits approach will ensure you keep it that way. What if you’re terrified to speak in front of a crowd? You need to get over it. As a business owner you’ll often need to speak in front of people, many of them strangers. Overcome your fear quickly by finding and joining a Toastmasters group in your local area. Online Networking The Internet has opened up an entirely new avenue of networking for small business owners. That gives you an opportunity to reach out a bit further than you would be able to if you just had your local region. There are thousands of business discussion lists and online forums where people with common issues discuss everything about a particular topic. Your goal is to find three or four discussion lists or online forums that contain prime prospects for your services, and participate by commenting a minimum of at least once a week on the topic at hand. One thing to keep in mind is that these are not places to drop by and send out an ad about your product or service. The objective is to build trusting relationships with the people involved who will eventually buy what


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you have to sell. You should behave no differently in these online discussions from how you would if you were in a room full of people. Before you jump in and get started, take a look at the following guidelines to make sure this approach will work for you. Determine why. What’s the purpose? Before you begin, decide why you want to expand your networking to the Internet. Is it for professional development, finding new business opportunities, expanding your sales network, or some other reason? Create a plan. Determine whom you are looking for, where you will look, what you will do when you get there, and when you will do it. Write it down and make it a habit. A consistent online presence will help you make great strides toward your networking goal. It’s about people. You may be staring at a screen and typing on a keyboard, but never forget that you are dealing with people. Find two or three places to network on the Internet. A couple of forums and perhaps one discussion list. Post to these sites at least once a week. Focus on building strategic alliances. Find noncompeting businesses that complement what your company has to offer. Exchange links. Offer something from the other company to add value to your clients. Search out associations that have an online presence. Does the networking organization you belong to offline have an online counterpart? Get involved and make the most of your membership. Don’t sell. Remember you are networking. You wouldn’t walk up to a stranger at a networking function and shove your brochure in their face. Don’t do it online, either! Use a signature file. This is your online business card. It should include your name, contact information, and a call to action to get


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them to do something further. An acceptable length for sig files is four to six lines. Lead forum discussions. Help other people connect by being the leader in a discussion or other online forum. Lurk a little. Don’t just barge in as the expert. Read the posts for the group first. Get a feel for the personality of the group and adjust your style to fit. Get involved. Most online groups parallel offline groups. Many people are members, but only a handful get involved. Make it worth your while. Attack the issue, not the person. Disagreements occur online more frequently due to the absence of tone and body language. If you are involved, make sure you deal with the issue. Don’t ever attack the person! Take it private. If you find that a discussion begun on a group discussion list applies to only two or three people, take it off the list. Your listmates will thank you for not wasting their time, and your discussion will be much more productive. Give value. Answer questions, provide thought provoking discussion topics. Remember to give before you receive. Give it the face-to-face test. Weigh what you are planning to do with the face-to-face test. In other words, would you do the same thing if you were face-to-face in a room of 50 to 100 people? Create a community. Start a list of your own for like-minded individuals. Watch your language. Online, your words create the first impression just like your physical presence does at face-to-face meetings. Be the business professional that you are. Add spell check. Even the best spellers make a typo now and then. Integrate a spell checker into your computer and proof your messages carefully.


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Look for people in your local area. It’s amazing how small the Internet really is. Watch other people’s signature files for those who are in your local area. Make contact with them off list. Connect with them face-to-face when possible. Keep in touch. It’s important to nurture your online network just as you do your offline network. Send interesting articles and information. Connect just to say hello. Track your success. Develop a method to track where your contacts are coming from. If you’re not sure, ask. If it doesn’t add value, drop it. Clutter in your e-mail box is not fun. If you find yourself deleting a lot of discussion list messages or moving them somewhere to read later, consider removing yourself from the list. Can the “me-toos.” The Internet is a worldwide communication tool. Many people pay dearly to connect and download messages. Respect that by not cluttering up a discussion list with short me-too messages. If you really feel a need to do this, send a private e-mail to the person you are agreeing with. Face-to-Face Networking This is a good avenue for you to connect with people and to get the word out about your business. Make sure the activities you involve yourself in give value back to you. Networking is an expensive but necessary activity for any business owner. Chambers of commerce are one of the best places to start for small business owners. There is probably one in your area. Use your time wisely when choosing face-to-face networking as a marketing strategy. It has the potential for eating up a lot of your precious hours with little return. Here are some ways you can make it work for you. Be prepared with a networking goal. Whom do you want to meet? Why are you there? Have a purpose. Set a goal. How will


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you know if you’ve accomplished what you went for if you don’t set a goal before you get there? Have a conversation icebreaker ready. Read the paper, listen to the news. Ask about the speaker for the meeting or the organization. Get ’em talking! Network in the right places. If the function doesn’t include possible prospects, potential strategic alliances or doesn’t increase your professional skills, evaluate whether it’s the right place for you to be networking. Your time is your most precious commodity. Use it wisely. Network with the right people. Who are they? Can they link you to the people you want to know? Do they fit with your overall plan for your business? Dress for success. It’s about business. Look the part. First impressions are important. If you want to be considered a successful businessperson, make sure you dress like one. Go with giving in mind. The main rule of thumb in networking is to give first. You don’t want to be known as a taker. People can see these types coming a mile away. When talking to a new contact, think about what action you can take to help them. Have your 10-second introduction ready. Practice it until it rolls right off your lips. Make it sound natural, not pitchy. A good technique is to use the do you know approach. For example, “Do you know how hard it is for most people to manage their time? Well, I help them do that.” Arrive early and act like a host. It’s easier to meet strangers when you’re one of the first to arrive. Much better than walking into a room full of people you don’t know! Find common ground, then give your card. There’s nothing worse than having a business card shoved in your face as soon as


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someone’s name is out of their mouth. They don’t even know if you’re a possible prospect who would buy from them! Make appointments, not sales. Discuss a general time for contact. It’s not always possible to nail a specific date and time down during your networking function. Make sure they will be available when you call so you won’t end up fighting a gatekeeper. Listen. Think silent. Use the 80/20 rule. Listen 80 percent of the time and talk 20 percent of the time. Don’t clump. Don’t spend your entire time at the networking function with the people you already know. You’re there to meet people you have never met before. Seek out unfamiliar faces. Choose your seating partner in advance. And make it someone you don’t know. Did you meet someone you’d like to know a little more about? Ask them where they’re sitting and if you might join them. Make the first move. Introduce yourself. Shake hands firmly. Smile. Make them comfortable by asking about them. Forget the food. Or enjoy it very early in the meeting. It’s tough (and rude) to talk with your mouth full. Shaking hands with someone who just popped a luscious chicken wing into their mouth isn’t pleasant, either. Wear your name tag on your right. When you shake hands, your eyes naturally go to the person’s right shoulder. Make it easy for them to find out who you are. Ask for help. People love to give advice and be helpful. If you’re looking for something or someone in particular, seek out the contact in your network who is most likely to have the information, and ask for their help. Walk around. Don’t expect people to come to you. At a networking function, new people arrive at different intervals. Walk the


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room a couple of times to ensure you’ve met whom you were intending to meet. Be happy, have fun. Networking is work that you can have fun doing. People like to be around other people who are having a good time. You’ll be amazed at how many people are drawn to a group of folks who look like they’re having fun. Exit gracefully. When you’ve connected with someone, don’t just walk away. Be gracious. Introduce them to someone else or make a comment about how much you value their time such as, “I’ve really enjoyed talking with you and look forward to having further discussion. I’m sure there are probably a lot of people you’d like to meet and I don’t want to monopolize your time.” Don’t drink. A clear head is a must for successful networking. It’s no time to get loose and lose your inhibitions because you’re drinking an alcoholic beverage. Connect/reconnect. Spend the majority of your time talking to people you don’t know and a minimum reconnecting with your existing relationships. Sell appointments, not products. Don’t even try to sell that hot new product at the networking function. If someone is interested, confirm an appointment for further discussion. Ask questions. Most people really like to talk about themselves. Use open-ended questions to keep the discussion going. Openended questions are those that cannot be answered with a yes or no. Welcome strangers to your table. Don’t reserve every seat and act like a grump if someone unfamiliar wants to sit there. Welcome the opportunity that a stranger presents. They may be your next prospect. Carry a pen. Jot notes on the back of business cards about commitments you’ve made, where you met the person, or just general impressions. Much better than working from memory!


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Time is precious. Spend about three to five minutes with the people you meet before you move on. Organize your pockets. Keep your cards in one pocket and cards you receive in another pocket. Have a system so you don’t confuse your pockets. Talk from strength. Don’t act needy even if you are. No one wants to be associated with someone who is not perceived to be a success. Visualize your success and act that vision. Create a Web Site If you don’t already have a web site, make it a priority. It’s not expensive and it works for you 24 hours a day, seven days a week. It doesn’t have to be fancy with a bunch of bells and whistles, but it should clearly communicate what you offer and how you help your customers. To get your web site online, you’ll need a web hosting company. Your best bet is to ask a trusted colleague or friend whom they recommend. Perhaps you know someone from one of your professional organizations. Next, you’ll need someone who can design the site for you. You can outsource this to a company or purchase do-it-yourself templates or software. What direction you take depends on your budget and your time availability. Even if your web site is just an online brochure, make sure you set it up with an option to collect e-mail addresses. You’ll need to trade something to get your visitor’s e-mail address. You could offer a free newsletter or tip sheet for this information. Remember that your list is one of your most valuable assets, so get moving. E-Mail Marketing E-mail marketing is one of the easiest ways to keep in touch with your clients and prospects. It’s cost effective, too. The only downside is that


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the noise level of e-mail has gone way up over the past few years. Now your e-mail message has to not only fight to get to a person’s mailbox, but it has to fight to get read, too. It’s important for you to make sure you have recorded your customer’s e-mail address as part of their contact details for regularly connecting and for advising them of new products and services you offer. That’s also why you want a way to capture e-mail addresses from your web site, too. E-mail can be used as a relationship-building tool to turn lookers into buyers and increase your bottom line.

Have a Referral Marketing Strategy How do you find most of your new service providers? If you’re like most other people, you ask your friends and colleagues whom they use and why. Then you narrow down your choice and decide whom you will do business with. Your customers do that too. With a referral marketing strategy you proactively create opportunities for people to refer business to you. There are principal players you’ll want to have relationships with to make the most of your referral marketing strategy. Current Customers Your current customers are the most valuable referral source you have available. Why? Because they already know you and what you have to offer. Your customers can provide the best testimonials to convince others of how good you are. Influencers People who have a strong connection to your customer base, but don’t serve them directly. You can recognize them easily as they normally have a big crowd around them at functions. Everyone you talk to seems to know who they are or has heard of them before.


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Insiders These people have the inside scoop on what’s going on with your client base and can open doors for you to the right people who will buy what you have to offer. Leaders Local business leaders or association or trade group leaders who can provide go to information for those in your industry. The people who know and respect you won’t have any problems referring business to you. But remember they’re busy people, too, and don’t think about your business each and every waking hour like you do. That means you’ll need to ask for their referrals. It’s not hard to ask for referrals, but most people ask for them the wrong way. Time and again, people ask, “Do you know anyone who could use my services?” “Well, maybe, but I can’t think of anyone right now” is the typical response. You need to ask the question the right way. Make sure you use an openended question and identify specifically whom you are seeking. The formula for your question is “Whom do you know that (your ideal prospect description)?” You want to create a visual picture of someone in their minds so they can put faces and names together. If you want to use a more formal method for generating referrals, sending a letter to your current customers works great. You could easily wrap this into a combination thank-you and referral letter at the same time. Hitting a customer for referrals right after they’ve made a satisfactory purchase is a really good idea. A sample Thank-You Letter to Create Sales and Referrals is included in Chapter 9. If your customers are business owners, you can seize an opportunity to have them write an endorsement letter for you. Make sure you cover all the costs associated with this type of arrangement. The idea is that they would send a letter telling their customers about what you have to offer and providing a written endorsement. You can find the Endorsement Letter sample in Chapter 9. There are mixed opinions about whether to reward your referrers with some type of monetary compensation. Some are prohibited by law.


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You’ll need to make a decision about how you will compensate your referrer when you get new business. At least send a thank-you note. Whether you send a gift or money is completely up to you. Affiliate Marketing What exactly is affiliate marketing, anyway? Simply stated, it’s pay for performance marketing. You sell someone’s product and they give you a cut of the action. Your portion can be a set percentage, such as 25 percent, or a standard dollar amount. It’s like a referral program. Have you ever referred business to a colleague and gotten something (money or a gift) in return? Same concept. Affiliate marketing leverages off the strategic alliance partnership method of marketing and can provide passive income for your small business. Your company becomes an outsourced sales agent for another company by advertising their products or services. Passive income is money you can make with little or no effort involved. It’s all about automation. There are so many choices available choosing a strategy can be hard to narrow down. It can come in many forms: recurring income, residual income, or one-time income. It may originate from a product your company sells, or another company’s product, or an affiliate program of which you are a member. There are thousands of affiliate programs available offering a variety of products and services—from those offered by independent small business owners like me to huge affiliate program networks like Commission Junction, LinkShare, ClickBank. You can promote just about anything you can think of from insurance to pet supplies to banks, to wireless service and more; the options are pretty much limitless. The best place to start when deciding what to offer is with your existing business. Think about what would add value to your business and browse the affiliate networks to find available products or services, or head on over to a search engine and search for Affiliate plus your topic.


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Each affiliate program has a payment strategy. You make a certain amount each time you refer a customer who buys what they sell. It’s a great way to increase the cash flow in your business with a small amount of effort. Percent of Sale. When you sell a merchant’s product, you receive a percent of the sales price. The range for this can be from 3 percent to as high as 75 percent. The majority of programs are set up using this method. Pay per Lead. Some merchants who have a longer sales cycle will offer this type of program. They pay you for the prospect who has come to their web site via your affiliate link when the prospect takes a certain action such as filling out a form to get on a mailing list. The range for pay per lead programs is typically from $.50 to $50. Recurring Income. Common among membership sites. The merchant pays you a set amount (or percentage) on a continuing basis as long as the customer you referred remains a customer. Residual Income. Commissions that continue to pay you each time the customer you referred buys from the merchant. You actually become the virtual account manager for the customer except there’s no ongoing work involved. Once your customer is referred and buys the merchant’s product, the merchant remembers who referred the customer, and you get commission for all the future sales. Two-tier. Good if you want not only to promote the merchant product, but also the merchant’s affiliate program. In a two-tier program, you get paid when anyone who joins the affiliate program using your affiliate link makes a sale.


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FORMATTING YOUR MARKETING MESSAGES FOR MAXIMUM CASH FLOW Whether you’re developing a print ad, flyer, brochure, or some other type of marketing message, it’s important that you follow a prescribed style that will get your prospects to take notice and buy what you have to sell. A typical marketing piece for a small business includes the company name or logo on top, the company tag line in the middle, and contact details at the bottom. Boring. The only thing this ad will do is drain your bank account. Take a look at your local paper. Notice the ads. Most of them will be in the format just described and most, if not all of them, will be overlooked by the prospects they are aimed at, because . . . who cares? Your prospect won’t. They’ll more than likely completely overlook your marketing piece, not only because it looks like 80 percent of other small business ads, but because it has several fatal mistakes. To sizzle, your marketing materials should:

1. 2. 3. 4.

Start with a grab ’em headline. Follow with a transitional subhead. Make the body count. Give them a reason to call—now.

A small business owner was thrilled because she had placed her first ad in the newspaper. When she met with me, she brought the newspaper her ad had appeared in to show me what it looked like. As we talked, I asked her what type of response she had received to her ad as a result. Her response? “I haven’t received any response yet, but I’m sure I will. It just takes time.” Here’s the problem. Her ad looked just like most other small business ads—name at the top, tag line, and phone number. There was nothing in the ad that would pique her prospect’s interest and make


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them call. On top of that, the newspaper was a week old. If she had not received any response to her ad yet, she never would. Newspapers are a short-term medium. You will know right away if your ad works. So what do you do about it if your ads look like this? Reformat your ad into one that sizzles, using the structure identified. Put together a plan for consistent marketing in the newspaper if that’s the best medium for you. Typically, your prospects must see your ad at least six times before they will take action. One ad, one time in the paper is just a waste of money. You will have the best success if you use a two-step method for your marketing. That means you will need to take two steps before you can sell your prospect. Your marketing piece simply identifies those prospects who are interested in what you have to offer. It does not sell anything. It offers a free report or some other tangible item that gets your prospects to respond. Brainstorm to identify what you might be able to offer your prospects. Free report titles normally include a number like The Top 10 Ways to Get the Most Out of Your New Drill or 8 Secrets You Never Knew about Keeping Your Cat Healthy or 14 Ways to Capture Her Heart with Flowers. You trade this item for their contact information and as a result have identified a warm prospect that will more than likely buy your product or services at some time in the future. This is an excellent list building idea and gives you an opportunity to market to this group again and again. Using Direct Mail to Grow Your Business Some call it “junk mail.” Is it really? That depends. Have you ever responded to an unsolicited piece of mail like a free report, credit card offer, book club, or magazine subscription? These weren’t junk mail—were they? Why not? Because it interested you. Direct mail is only junk mail if it doesn’t apply to you. But there are some critical


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rules of the game for junk mail to be successful. If you don’t follow these rules, you could easily waste a lot of money—quickly. Rules of the Game Rule #1: Your list is the most critical component. Rule #2: Your copy must focus on solving the pain of your prospect. Rule #3: You must include a call to action. Do you have an in-house mailing list? You should. Compile and maintain a list of your customers. Track their habits. Monitor your list so you know when they are doing business with you differently. Collect and track those five critical pieces of information mentioned in Chapter 8. Your Copy Must Focus on Solving the Pain of Your Prospect. Your prospects buy benefits, not features. In other words, they don’t buy things; they buy what those things will do for them. You’ve probably heard about the customer who went into the store to buy a hole-maker (benefit). The salesperson knew he was shopping for a drill (feature). Take a few minutes right now to list the features of your products or services. Then translate those features into benefits for your customer. Emotion Provoking Copy. Next, translate those benefits into emotion provoking copy to get right to the heart of your prospect’s pain. Amazingly, free is still the hottest word in marketing copy. People respond to it most often. Use Testimonials. It helps if your prospect can see other people who have used your product or service. Testimonials can do that for you. How do you collect testimonials? Ask for them. People are typically glad to oblige. And testimonials don’t have to be written in a formal fashion on letterhead. Some of my best testimonials are ones I’ve heard my clients say while I was talking with them. If you hear a good


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testimonial just ask, “May I quote you on that in my marketing materials?” Simple, huh? You Must Include a Call to Action. Your prospects need to be told exactly what action you want them to take. The more specific you are, the better; that means a bigger response rate for you. It seems like a no-brainer, but it’s not. Tell your prospects the exact steps you want them to take—from filling out a form to dropping it into the mail. You’ll reap the rewards when you take the time to detail the action steps for them. Don’t Forget the P.S. Never send a direct mail piece without a P.S. Why? Because many people read only the P.S. If you skip this step, you may lose prospects. Make sure you include enough information in your P.S. so your prospect doesn’t have to dig through the whole mail piece to respond. A “But Wait” Works Great, Too! You’ve probably seen advertisements on TV that include some type of special offer. They normally include a “But Wait” to get prospects to act now. This will work for you in direct mail, too. Try to include one if at all possible. Your Secret Arsenal—The Swipe File. Read the ads in the paper. Closely study the direct mail you receive. Save the ones you like for future marketing ideas. This is your swipe file of wonderful, thought provoking ideas you can review when creating your marketing pieces. I am not suggesting that you copy other people’s work—that’s illegal. Your swipe file should be a collection of ideas you can use for inspiration to create your own marketing materials. How Long Should Your Direct Marketing Piece Be? As long as it needs to be to bring your prospect to a “pain” point and then


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sell them on your offer. If I handed you a one-sheet flyer, a purple envelope with a two-page letter in it, and a white envelope with an eight-page letter in it, could you tell me which one is junk? Nope. It all depends on the list. That’s why your list is so important. If you send your mail piece to the wrong list, it’s just junk mail. If you send it to the right list, your bank account will grow. Test and measure your response—every time. Direct mail is expensive. You may be in a hurry to get your mail piece out, but do take the time to test it. There are two key items that affect the success of your mail piece—your list (the most important) and your offer. Test your list and your offer. Don’t ever make more than one change to your direct mail piece at a time. You won’t know what worked or didn’t work if you do. Measure Your Response. In some instances, this will be as simple as asking, “How did you hear about us?” The best way is to code your marketing pieces so you can see what is the most effective. One of the easiest tactics is to indicate an extension number on the required response, and then you know what drove the customer to you. For example, your message might be “Simply call 813-555-2455, extension 100 today to order your free Success Strategies Guide.” When people ask for extension 100, you know what marketing piece they are responding to. What Really Counts Is Your Return on Investment (ROI). Figure out what your ROI needs to be before sending your marketing piece. Typical response rates are one to two percent. So if it costs you $600 to send to 1,000 people and the product you are selling is $60, 10 people must purchase in order for you to break even. Anything over that is pure profit.


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FREE MARKETING OPTIONS Get Great Results without Spending a Dime Your small business can greatly benefit from identifying and executing a public relations strategy. Think about this for a minute. The newspaper must be printed every day. Reporters need your news. Opinions vary, but at any given time at least 50 percent of the paper is compiled from news releases as a result of a great public relations strategy. Follow the guidelines identified here and you’ll get some of the best exposure for your business. If you need more help, take the PR Primer for Small Business Owners at smallbiz-bootcamp.com/pr_primer_course.html.

1. Define your goal. 2. Determine whether you want local, regional, state, or national exposure. 3. Identify key publications, editors, and reporters. 4. Depending on your goal, identify those publications, editors, and reporters who cover your business focus. Make a list of contact information. 5. Create an action plan. The last step is the really important part. None of the rest will matter if you don’t take action. Identify how often you will send out news releases to your identified targets and plot it out on an action plan— what, who, and when. Remember you should send a news release at least once a month. That’s only 12 times a year. Never forget—reporters and editors are people, too. Building relationships will help you move closer to success. How to Get into the News It’s really pretty easy to get into the news. Focus your efforts on how you can help the publication or people you have targeted. Communi-


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cating with them from a helping, not selling, perspective will go a long way to getting your business into the news. Here are some ideas for you to consider: • • • • • • • • •

Identify a local angle to a national story. Piggyback on news events. Tell the media about a trend. Offer free advice. How you can help? Give examples. Write how-to articles. Take a stand on an issue. Take a poll or a survey. Have a contest. Create tip sheets.

If you’re like most other small business owners, you might be thinking, “What do I have to say that’s news?” Take a look at a short list of ideas. Twenty-Five Reasons to Issue a Press Release Just for starters, here are 25 reasons to issue a press release. In your day-to-day activities, consistently be on the lookout for opportunities to let the world know about you.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Accomplishments. Alliance with another organization. Appointment to a board or committee. Articles by or about you. Awards you are receiving. Company birthday. Contest you are sponsoring. Contributions to charities, donations of time or money. Expanded facilities. Expanded hours.


146 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

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Free classes. Free demonstrations. Free information at your web site. Free offer. Free samples. New products or services. Newsletter you are starting. Open house. Partnerships or strategic business alliances. Poll you have taken. Public issues, where you stand. Sponsorships. Trends you are seeing. Weather-related event. Where you stand on a controversial topic.

See how easy that is? This list of topics would cover you for two years at one press release a month. You just can’t afford not to make sure the press knows about your business, and it’s free.


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CHAPTER

9

s Resources


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These resources have been designed to help you work through the different issues I’ve addressed and can be used over and over again as you need them. You may directly access actual copies of these resources at the Small Business Cash Flow web site. Simply go to www.cashflowtruth.com/resources, enter username smallbusinessowner and password cashisking to pick up your copies. You’ll find blank templates of each of the forms and letters you can use in your business. I’d love to hear about your challenges and success, too. Please feel free to drop me an e-mail at [email protected].

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BUSINESS STATE OF AFFAIRS WORKSHEET Use this worksheet to collect your thoughts prior to your discussion with your accountant.

1.

What did you accomplish this year that you’re most proud of?

2.

What was your most difficult experience this year?

3.

What was your biggest discovery—think of this in terms of an AHA!

4.

What would you like your biggest accomplishment to be at the end of this year?

5.

Where would you like your business to be in terms of sales revenues, size, number of employees, and location(s): • At the end of next year? • In two years?

6.

Who are your top five competitors and why?

7.

What aren’t your competitors doing that customers need?

8.

What trends do you see in the market that could make your products and services obsolete?

9.

What are your competitors doing to push themselves ahead of the pack?

10. What is your typical day like from start to finish? What would you like to change about it?


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Resources

REQUIREMENTS WORKSHEET Answer each question with a simple yes or no. Yes

1.

I’m comfortable having a business discussion via e-mail.

2.

I’d rather have business discussions on the phone.

3.

I’m more comfortable if I can be face-to-face with someone during a business discussion.

4.

I’m on top of my tax situation and fully aware of my obligations.

5.

I’d rather not learn the ins and outs of the tax code; someone else can do that for me.

6.

I hate organizing the financial papers that come with owning a business.

7.

I get a lot of satisfaction from sorting through monthly receipts and tracking how they impact my business.

8.

I prefer working with a large firm.

9.

I’d rather do business with a small specialized firm.

No

10. I could benefit from having a partner who can connect me to other business opportunities. 11.

I like to bounce business growth ideas off an expert.

12. I’m willing to dedicate cash resources to get the results I need. Based on your answers, jot down your personal requirements for each area. Geographical Proximity Service Level Paper Handling Business Size Service Fees


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ACCOUNTANT DATA SHEET Complete this form for every prospective accountant. Use it as your guide as you conduct interviews. Accountant Name: ____________________________________________ Company Name: _____________________________________________ Phone: ____________________ Recommended By: ___________________________________________ Notes:

Interview Questions Do you specialize in businesses like mine?

What have you done for others?

How will I be charged?

What’s it feel like?

What is your education and experience?


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Resources

SMALL BUSINESS ADMINISTRATION BANK LOAN QUESTIONNAIRE Be prepared for key questions a banker will be asking before you apply for a loan. 1.

Can your business repay the loan? (Is cash flow greater than debt service?)

2.

Can you repay the loan if the business fails? (Is collateral sufficient to repay the loan?)

3.

Does your business collect its bills?

4.

Does your business control its inventory?

5.

Does your business pay its bills?

6.

Are the officers committed to the business?

7.

Does your business have a profitable operating history?

8.

Does your business match its sources and uses of funds?

9.

Are your business sales growing?

10. Does your business control expenses? 11.

Are profits increasing as a percentage of sales?

12. Is there any discretionary cash flow? 13. What is the future of the industry? 14. Who is your competition and what are their strengths and weaknesses?

Source: Small Business Administration borrowing.html).

(sba.gov/financing/preparation/


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FEDERAL TRADE COMMISSION—FACTS FOR CONSUMERS CHOOSING AND USING CREDIT CARDS* Chances are you’ve gotten your share of preapproved credit card offers in the mail, some with low introductory rates and other perks. Many of these solicitations urge you to accept “before the offer expires.” Before you accept, shop around to get the best deal. Credit Card Terms A credit card is a form of borrowing that often involves charges. Credit terms and conditions affect your overall cost. So it’s wise to compare terms and fees before you agree to open a credit or charge card account. The following are some important terms to consider that generally must be disclosed in credit card applications or in solicitations that require no application. You also may want to ask about these terms when you’re shopping for a card. Annual Percentage Rate (APR) The APR is a measure of the cost of credit, expressed as a yearly rate. It also must be disclosed before you become obligated on the account and on your account statements. The card issuer also must disclose the “periodic rate”—the rate applied to your outstanding balance to figure the finance charge for each billing period. Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators—called indexes—change. Because the rate change is linked to the index’s performance, these plans are called “variable rate” programs. Rate changes raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer must also provide vari-

*Source: Federal Trade Commission (www.ftc.gov/bcp/conline/pubs/credit/choose.htm).


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ous information that discloses to you (1) that the rate may change and (2) how the rate is determined. Which index is used and what additional amount, the “margin,” is added to determine your new rate. At the latest, you also must receive information, before you become obligated on the account, about any limitations on how much and how often your rate may change. Free Period Also called a “grace period,” a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you’ll have enough time to pay. Annual Fees Most issuers charge annual membership or participation fees. They often range from $25 to $50, sometimes up to $100; gold or platinum cards often charge up to $75 and sometimes up to several hundred dollars. Transaction Fees and Other Charges A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card. Balance Computation Method for the Finance Charge If you don’t have a free period, or if you expect to pay for purchases over time, it’s important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a fi-


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nance charge you’ll pay—even if the APR and your buying patterns remain relatively constant. Balance computation methods include: Average Daily Balance. This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the average daily balance. Adjusted Balance. This is usually the most advantageous method for cardholders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount. Some creditors exclude prior, unpaid finance charges from the previous balance. Previous Balance. This is the amount you owed at the end of the previous billing period. Payments, credits, and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges. Two-cycle Balances. Issuers sometimes use various methods to calculate your balance that make use of your last two months’ account activity. Read your agreement carefully to find out if your issuer uses this approach and, if so, what specific two-cycle method is used. If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.


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Other Costs and Features. Credit terms vary among issuers. When shopping for a card, think about how you plan to use it. If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR, if there is a grace period for purchases. However, if you use the cash advance feature, many cards do not permit a grace period for the amounts due—even if they have a grace period for purchases. So, it may still be wise to consider the APR and balance computation method. Also, if you plan to pay for purchases over time, the APR and the balance computation method are definitely major considerations.


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RESOURCES

PUTTING YOUR HOME ON THE LOAN LINE IS RISKY BUSINESS* If you decide a home equity loan or line of credit is right for you, talk with several lenders, including at least one bank, savings and loan, or credit union in your community. Their loans may cost less than loans from finance companies. And don’t assume that if you’re on a fixed income or have credit problems, you won’t qualify for a loan from a bank, savings and loan, or credit union—they may have the loan you want! Do Your Homework Contact several lenders and be very careful about dealing with a lender who just appears at your door, calls you, or sends you mail. Ask friends and family for recommendations of lenders. Talk with banks, savings and loans, credit unions, and other lenders. If you choose to use a mortgage broker, remember they arrange loans but most do not lend directly. Compare their offers with those of other direct lenders. Be wary of home repair contractors that offer to arrange financing. You should still talk with other lenders to make sure you get the best deal. You may want to have the loan proceeds sent directly to you, not the contractor. Comparison Shop Comparing loan plans can help you get a better deal. Whether you begin your shopping by reading ads in your local newspapers, searching on the Internet, or looking in the phone book, ask lenders to explain the best loan plans they have for you. Beware of loan terms and conditions that may mean higher costs for you. Get answers to these questions and use the worksheet to compare loan plans:

*Source: The Federal Reserve Board (www.federalreserve.gov/pubs/riskyhomeloans/).


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Interest Rate and Payments • What are the monthly payments? Ask yourself if you can afford them. • What is the annual percentage rate (APR) on the loan? The APR is the cost of credit, expressed as a yearly rate. You can use the APR to compare one loan with another. • Will the interest rate change during the life of the loan? If so, when, how often, and by how much? Term of Loan • How many years will you have to repay the loan? • Is this a loan or a line of credit? A loan is for a fixed amount of money for a specific period of time; a line of credit is an amount of money you can draw as you need it. • Is there a balloon payment—a large single payment at the end of the loan term after a series of low monthly payments? When the balloon payment is due, you must pay the entire amount. Points and Fees • What will you have to pay in points and fees? One point equals 1 percent of the loan amount (1 point on a $10,000 loan is $100). Generally, the higher the points, the lower the interest rate. If points and fees are more than 5 percent of the loan amount, ask why. Traditional financial institutions normally charge between 1 and 3 percent of the loan amount in points and fees. • Are any of the application fees refundable if you don’t get the loan? • How and how much will the lender or broker be paid? Lenders and brokers may charge points or fees that you must pay at closing or add on to the cost of your loan, or both. Penalties • What is the penalty for late or missed payments? • What is the penalty if you pay off or refinance the loan early (that is, is there a prepayment penalty)?


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Credit Insurance Does the loan package include optional credit insurance, such as credit life, disability, or unemployment insurance? Depending on the type of policy, credit insurance can cover some or all of your payments if you can’t make them. Understand that you don’t have to buy optional credit insurance—that’s why it’s called “optional.” Don’t buy insurance you don’t need. Credit insurance may be a bad deal for you, especially if the premiums are collected upfront at the closing and financed as part of the loan. If you want optional credit insurance, ask if you can pay for it on a monthly basis after the loan is approved and closed. With monthly insurance premiums, you don’t pay interest and you can decide to cancel if the premiums are too high or if you believe you no longer want the insurance. After you have answers to these questions, start negotiating with more than one lender. Don’t be afraid to make lenders and brokers compete for your business by letting them know you are shopping for the best deal. Ask each lender to lower the points, fees, or interest rate. And ask each to meet—or beat—the terms of the other lenders. Once You’ve Selected a Lender, Get the Following • A Good Faith Estimate of all loan charges. The estimate must be sent within three days of applying. • Blank copies of the forms you’ll sign at closing, when the loan is final. Study them. If you don’t understand something, ask for an explanation. • Advance copies of the forms you’ll sign at the closing with the terms filled in. A week or two before the closing, contact the lender to find out if there have been any changes in the Good Faith Estimate. By law, you can inspect the final settlement statement (also called the HUD-1 or HUD-1A form) one day prior to closing. Study these forms. Write down any questions you want to ask.


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Think Twice before You Sign • Have a knowledgeable friend, relative, attorney, or housing counselor review the Good Faith Estimate and other loan papers before you sign the loan contract. Be sure the terms are the same ones you agreed to. For example, a lender should not promise one APR and then—without good reason—increase it at closing. • Refer to the list of questions you’ve written down. Ask where these terms are covered in the loan contract. And ask for an explanation of any dollar amount or term you don’t understand. Don’t let anyone rush you into signing the loan contract. • Make sure all promises, oral and otherwise, are put in writing. It’s only what’s in writing that counts. • Get a copy of the documents you signed before you leave the closing. Don’t Sign on the Dotted Line if the Lender • Tells you to falsify information on the loan application (for example, suggests that you write down more income than you really have). • Pressures you into applying for a loan for more money than you need, or one that has monthly payments larger than you can afford. • Promises one set of terms but gives you another with no good reason for the change. • Tells you to sign blank forms or forms that aren’t completely filled in. If an item is supposed to be blank, draw a line through the space and initial it. • Pressures you to sign today. A good deal today should be available tomorrow. You Have Three Business Days to Cancel the Loan If you’re using your home as security for a home equity loan (or for a second mortgage loan or a line of credit), federal law gives you three business days after signing the loan papers to cancel the deal—for any


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reason—without penalty. You must cancel in writing. The lender must return any money you have paid to date. Do You Think You’ve Made a Mistake? Has the three-day period during which you may cancel passed and you’re worried that you’ve gotten in over your head? Do you think your loan fees were too high? Do you believe you were steered into monthly payments you can’t afford? Has your lender repeatedly pressured you to refinance? Is your loan covered by insurance you don’t need or want? If you think you’ve been taken advantage of, state and federal laws may protect you. Also, the following organizations may be able to help: • Your local or state bar association—sometimes listed under Lawyers Referral Service in the yellow pages of your phone book. The association may be able to refer you to low-cost or no-cost lawyers who can help. • Your local consumer protection agency, state attorney general’s office, or state office on aging, listed in the Blue Pages of your phone book. • Your local fair housing group or affordable housing agency, housing counseling agency, or state housing agency.


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CASH FLOW BUDGET WORKSHEET Company Name

Cash Flow Budget—Year Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Totals

Sales 0 0 0 0 0 Total Sales

0

0

0

0

0

0

0

0

0

0

0

0

0

Expenses Licenses and Permits

0

Payments to Creditors

0

Payroll (Salaries and Wages)

0

Meals and Entertainment

0

Payroll Taxes

0

Affiliate Commissions

0

Subcontractors

0

Office Expense

0

Internet Expense

0

Printing

0

Insurance

0

Utilities

0

Office Supplies

0

Advertising

0

Marketing/Promotion

0

Professional Fees

0

Training and Education

0

Tax Payments

0

Dues and Subscriptions

0

Total Expenses Cashflow Surplus/Deficit (-) Opening Cash Balance Closing Cash Balance Minimum Cash Target

163


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MARKETING EXPERIMENTS PRICE TESTING BRIEF www.marketingexperiments.com* Do you know how to price your products or services to achieve the highest revenues? Our research suggests that you may never know unless you test. We recently released the audio recording of our clinic on this topic. You can listen to a recording of this clinic here: www.marketingexperiments.com/see/1107#PriceTesting. Which will generate more revenue? A lower price that drives more traffic and buyers? Or a higher price that may attract fewer buyers, but deliver more income per sale? Our testing tells us that the answer to those questions is: It depends. In this brief we review the data from two separate tests and show you how a lower price beat a higher price, and vice versa. Here are three points to consider as we present these test results:

1. Unless you are selling a commodity or a product that competes in a market ruled by rock-bottom prices, there is always some flexibility in your pricing. So you do have the opportunity to test. 2. Finding the best price for a product, service, or subscription is both a science and an art. A prospect’s perception of your product or service will play a part in determining their own opinion of the right price. However, the price itself can also have an impact on how the product or service is perceived, thus creating a kind of causal loop. Within this loop, you have to find the price point that brings you the highest revenues. 3. A very small difference in pricing can have a huge impact on your revenues. This is particularly true if you sell high volumes, or if you sell a subscription that could continue for years.

*Source: Marketing Experiments.Com—A division of Digital Trust Inc. © Digital Trust Inc.


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Resources Experiment #1

In our first experiment, we worked with a leading psychiatrist and author to determine how to maximize the online sales of his newly published book. The three price points we tested were:

1. $7.95 2. $14.00 3. $24.95 Which price point was best? Which price point yielded the most revenue? To answer these questions, we conducted a simple three-day pricing test. We drove a large volume of traffic to our site using just five search terms on Google AdWords. Using an A/B/C split test, we evenly distributed this traffic to three pages showing different pricing information. Here are the results of this three-day microtest: Pricing MicroTest #1

Orders Revenue

$7.95

$14.00

$24.95

390 $3,100.50

480 $6,720.00

300 $7,485.00

What You Need to Understand Based on number or orders, it appears that the $7.95 price point was perceived as a lesser value and that the $24.95 price point was too high. The $14.00 price point generated significantly more orders. But because of the larger price point, the $24.95 offer actually generated the most revenue. An important additional point: The higher price on the same book created a much higher profit margin, which resulted in greater profit generated on less physical units sold.


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Key Point For physical products, profit margin should always be taken into account. For subscription-based services, this is much less of an issue. However, marketing costs should always be taken into account. In our next experiment, we weigh the pay-per-click (PPC) marketing costs against the revenue generated. But first, one final note on this test: It is important to weigh the benefits of additional new customers against that of higher revenue. In the preceding example the additional 180 customers at the $14.00 price point may actually be worth more in the long run than the additional $765 of immediate revenue generated at the $24.95 price point. In other words, the additional revenue made in subsequent sales to these customers may more than make up for slightly less revenue on the first sale. Key Point It may be to your greatest advantage to select a price that generates slightly less revenue if that price also generates significantly more new customers. The average lifetime value of your customers and your ability to make additional sales to them will be the determining factors here.

Experiment #2 In this test, we used three different price points for a paid-subscription site. Again, we split the traffic evenly among three landing pages. The only thing that was altered was the price. The three subscription price points we tested were:

1. $10.00 per month 2. $12.50 per month 3. $14.95 per month


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Here are the initial testing results gathered over a four-day period: Pricing MicroTest #2

May 29 Orders May 30 Orders May 31 Orders June 1 Orders Total Orders Total Revenue

$10.00

$12.50

$14.95

33 30 49 44 156 $1,560.00

19 21 29 25 94 $1,175.00

15 18 16 25 74 $1,106.30

What You Need to Understand The $10 price point generated 33 percent more revenue than the next best price point. Here is an ROI analysis of all three price points based on a $0.09 average: Test #2 Return on Investment

Average CPC Marketing Cost Revenue Profit ROI

$10.00

$12.50

$14.95

$ 0.09 $ 808.02 $1,560.00 $7,511.98 93.06%

$ 0.09 $ 808.02 $1,175.00 4,366.98 45.42%

$ 0.09 $ 808.02 $1,106.30 $ 298.28 36.91%

What You Need to Understand While the PPC campaign remained profitable at all three price points, the ROI generated on the $10 price point was more than double that of the next best price. When ROI is calculated, it becomes even more obvious that the $10 price point is significantly better than the more expensive prices. And these numbers do not take into consideration recurring revenue.


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These results are even more dramatic when you factor in recurring revenue. Test #2 Projected Revenue

1 Month 4.5 Months 6 Months

$10.00

$12.50

$14.95

$35,100.00 $157,950.00 $210,600.00

$26,437.50 $118,968.75 $158,625.00

$24,891.75 $112,012.86 $149,350.50

What You Need to Understand At a 4.5-month average subscriber lifetime, the $10 price point generated 32.8 percent ($38,981.25) more revenue than the next best price point. However, because of the increased retention, the $10 price point actually generates closer to 77.0 percent ($91,631.25) more than the $12.50 price point. What’s important here is that in addition to generating more sales, the lower price point also increases retention, which creates even more profit over the long term. Key Point For subscription-based sites, consider selling long-term memberships as well. For more on this topic, see our report on subscription revenue: www.marketingexperiments.com/see/1091. Even with retail sites, the lifetime value of a customer shouldn’t be ignored. The additional sales you can make to existing customers may be significantly more valuable than the immediate additional sales. In these two tests, we have seen that intuition cannot be relied upon to predict optimal pricing. Sometimes a higher price creates more revenue, while other times a lower price will generate not only more immediate sales, but more recurring revenue as well. We have provided a downloadable spreadsheet tool that helps


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you calculate your revenue and profit for a number of price points: www.meclabs.com/MEC_Price-Testing_Analysis_Tool.xls. In our recent web clinic, we covered the functionality of this spreadsheet in great detail. To download the clinic recording, please visit: www.marketingexperiments.com/see/1107#PriceTesting. While testing your product or service pricing, keep the following three key guidelines in mind:

1. If you are selling a physical product, you will need to know what your competitors are charging for the same or a similar product, and get a feel for whatever added value a prospect might perceive when buying from you instead of anyone else. Is your brand stronger? Is your reputation stronger? Do people trust you more? Is your service superior? Do you provide services or bonuses along with the product? Do you offer better deals on shipping costs or warranties? All these elements can influence the perceived value of your products. For retail products, one excellent way to see what your competitors are charging is to go to a price comparison site like www.PriceGrabber.com. 2. If you are selling a service or subscription, it is harder to make such a clear comparison with competitors. The perceived value of your service will depend on many factors. In the case of a service or soft good, like an e-book, you should test a much wider range of price points. 3. For a product, a service, or a subscription, one key goal is to find the price that is too high. In other words, keep raising the price until the results clearly show you are charging too much. Then slowly inch back from there until you find the highest price the market will bear, giving you the highest revenue on sales. However, note that this highest effective price point, which will have the highest profit margin, may not necessarily be the best way to generate the greatest amount of new customers, as has been noted previously.


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Key Point If you haven’t overcharged at least once, you may not be charging enough. Always take a price test beyond where you think the consumer’s threshold is. The only way to zero in on your ideal price is by elevating it beyond the optimum and nudging it back down.

4. Conduct reliable A/B split testing on your pages, and test for a long enough period to be sure of the validity of your results. 5. Once you have found your optimum price point, try testing it again a few months later. Markets keep changing, and today’s best price may not be the best price six months from now. When evaluating your offer price, intuition will usually fail to deliver the ideal results. Testing is the only way to determine which approach will produce the most profit: a lower price that drives more traffic and buyers, or a higher price that may attract fewer buyers but deliver more income per sale. Every business is unique, and the preceding testing guidelines will help you determine your own ideal pricing structure.


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CREATING YOUR STRATEGIC ACTION PLAN Take some time prior to creating your strategic plan to capture your thoughts on the following questions. Reflecting on these items before you begin planning will ensure that your key issues are included in the plan. Where Are We Now? Assess your current situation. Identify what your business is doing well and why. __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ What aren’t we doing well and why? __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ What services/products do we provide, to whom, and what are their expectations? Be as specific as possible. __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________


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How Well We Are Doing Meeting our past objectives and why? __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Meeting the needs of our clients / customers and why? __________________________________________________________ __________________________________________________________ __________________________________________________________ What have our barriers to success been in the past? __________________________________________________________ __________________________________________________________ __________________________________________________________ Where Do We Want to Be? Why does your company exist? Review, update, and prioritize goals and create specific objectives to achieve your mission. Jot down here any key thoughts to remember. __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________


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What Do We Have to Do to Get There? Identify any factors that are critical for your success—those things that must go right to achieve the objectives. __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Now identify possible barriers—those conditions that can hinder the achievement of objectives. __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Prepare Your Action Plan Take all of the information you’ve just captured and create a month-bymonth plan for action. Break items down into achievable pieces and set target dates. The key to success in planning is to get it down on paper. How Do We Monitor Our Progress? Having a plan does not change anything. Working the plan does. The key to successfully working a plan is establishing an ongoing method for monitoring progress and making adjustments to the plan. At the very least, you should conduct a quarterly review of your action plan to determine what is working and what is not, and make any necessary adjustments.


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Organizational Chart

Shareholders

Chief Operating Officer

Vice President Marketing

Vice President Operations

Vice President Finance

Sales Manager

Production Manager

Accounts Receivable Manager

Advertising and Market Research Manager

Service Manager

Accounts Payable Manager

Facilities Manager


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SIMPLE ORGANIZATIONAL ASSESSMENT Strongly Agree Agree

Disagree

Strongly Disagree

Neither

1. I feel encouraged to come up with new and better ways of doing things.

1

2

3

4

5

2. When I do a good job, my accomplishments are recognized.

1

2

3

4

5

3. I have the freedom to make decisions to get the job done.

1

2

3

4

5

4. My company provides opportunities for professional development that improve my job performance.

1

2

3

4

5

5. Sharing ideas and working together to get things done is encouraged across all departments.

1

2

3

4

5

6. My company respects employees of different ages, races, genders, cultures, religions, and ethnic backgrounds.

1

2

3

4

5

7. I understand the criteria that will be used to evaluate my performance.

1

2

3

4

5

8. My company provides the flexibility needed to balance the demands of work and personal life.

1

2

3

4

5

9. My company creates an environment where work is enjoyable.

1

2

3

4

5

1

2

3

4

5

10. In my company, we believe it is important to learn from both successes and failures.


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Resources SIMPLE ORGANIZATIONAL ASSESSMENT (Continued) Strongly Agree Agree

Disagree

Strongly Disagree

Neither

11. Information in this company is openly shared among employees.

1

2

3

4

5

12. I understand how my position supports the company’s direction.

1

2

3

4

5

13. I have enough information to communicate the company’s goals and direction to others.

1

2

3

4

5

14. I have a good understanding of this company’s business direction.

1

2

3

4

5

15. The people I work with cooperate to get the job done.

1

2

3

4

5

16. I feel valued as an employee of this company.

1

2

3

4

5

17. My job is meaningful and makes good use of my skills and abilities.

1

2

3

4

5

18. My company regularly provides me with training and tools to help me perform my job.

1

2

3

4

5

19. People in this company are doing the right things to improve quality.

1

2

3

4

5

20. My company rewards and recognizes successful team effort.

1

2

3

4

5

21. In this company, employees are rewarded according to their skills and contributions to organizational success.

1

2

3

4

5

Customer Name

Company

Address

180 Phone

Fax

E-mail

Purchase Date

CUSTOMER TRACKING FORM Item

Value

Contact Date

Contact Type

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Contact at-risk customers.

Send thank-you to last month’s new customers.

Identify lapsed customers. Prepare and send reactivate letter.


Call the most valuable customers.

Send referral letter.



Prepare and send special promo letter.


Month Ten



Prepare and send special promo letter.

Month Four


Month Eleven


Send referral letter.


Month Five


Identify customers who have not returned in six months. Prepare and send reactivate letter.

Month Twelve

Send What’s New newsletter to all customers.

Send thinking-of-you note to the top 20% of customers.


Month Six

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Identify customers who have not returned in six months. Prepare and send reactivate letter.

Month Three

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Month Eight

Month Seven

Notify customers of current special programs.

Send thank-you postcard to last month’s new customers.


Prepare and send referral letter.

Clean up customer database.

Send thank-you postcard to last month’s new customers.

Month Two

Month One

SAMPLE CUSTOMER CONTACT ACTION PLAN

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MORE ABOUT SURVEYS Your customers want to tell you what they like and don’t like about your company, but most of them won’t offer the information without being asked. Surveys are a great way to get that information from your customer. Your survey will depend on what your objective is and whom you are targeting. Begin with the end in mind. What’s the Purpose of the Survey? There has to be a reason. Do you want feedback on a new product, customer service response, opinions on current products, or something else? Determining your reason upfront will help you design the right questions so you get the answers you seek. What Are You Going to Do with the Information When You Get It? Don’t do a survey to do a survey. Determine upfront what you will do with the information (even if you don’t agree with the responses). Will you change your processes, contact procedures, or product delivery? Taking a survey and changing nothing as a result reduces your credibility with your customer and wastes your precious time. Make It Easy If you’re surveying your web-based customers, do a Web survey. You might want to give them the option of e-mail-based or Internet-based survey. If it’s your regular mail customers, do your survey via mail and give them the option to take it online or fax their answers back to you. Give your customers an incentive to fill out the survey and you’ll get better response rates. If you use USPS mail, make sure you include a stamped return envelope or use a tear off prepaid postcard.


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SAMPLE THANK-YOU POSTCARD These are printed four to a page on heavy stock then cut. Use a stock that is glossy on one side for a professional look. Your printer should be able to get what you need.

Thank You for Your Recent Purchase We appreciate the opportunity to serve you. Satisfied customers are our best advertisement, so I encourage you to tell us how we’re doing. Contact us anytime. E-mail: [email protected] Phone: xxx-xxx-xxxx

Thank You www.yourwebsite.com Company Name Address


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SAMPLE LETTER TO REACTIVATE LAPSED CUSTOMER

Re: Priority Customer Code—xxxx Dear Customer Name:

Here’s $50.00—Free with Your Next Order! We were thrilled to do business with you six months ago, but we haven’t heard from you since and honestly, I’m confused. If there was something wrong with your last order or if you weren’t pleased with our service, I want to know so I can fix it. Maybe you’ve been meaning to give us a call and due to your busy schedule it’s just slipped your mind. Frankly, I’d like you to come back and do business with us again. Just to let you know how much we appreciate your business, I’m giving you a $50.00 credit good toward your next order. No strings attached, no minimum order requirements, and no obligation to buy from us again.

Why Am I Doing This? It’s simple. I want to be able to serve you again. Here’s all you need to do: 1. Call xxx-xxx-xxxx to place your risk-free order. 2. Provide your special “priority customer code number” found at the top of this letter.


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That’s it! Whatever you order, your bill will show $50.00 automatically subtracted from the total. Then if you’re not completely satisfied for any reason, simply tell us and we’ll give you full 100%, no-questions-asked refund or replacement. I know you have a lot of choices. That’s why I’m giving you $50.00 “on the house” to let us prove we deserve your business. One important point. This savings voucher expires date (not more than 30 days away) and then this special one-time offer will be over. Don’t miss your chance to get $50.00—free. I look forward to welcoming you back. Best regards,

{Your name}

P.S. Use this letter just like a $50.00 “welcome back” check toward anything you order. Don’t worry, there are no strings attached, no minimums, and no obligation to use us in the future. This great offer won’t last forever; make sure you use your “free money” before date, not more than 30 days away.


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SAMPLE SURVEY/FEEDBACK FORM Your Opinion Counts! Thank you for the opportunity to serve you! Your feedback and opinions are important to us. Please take a few minutes to complete the information below. What did you like best about the services provided? ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ What could be improved? ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ Name______________________________________________________ Title________________________________________________________ Company___________________________________________________

Please check below: ❏ You may use my comments in complete or edited form in your promotional materials.

Thank you! We look forward to serving you in the future. Don’t forget to visit our web site at www.yourwebsite.com.


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STRATEGIC ALLIANCE PARTNER—FREE OFFER

Dear Mr. Jones: I have a rather unusual proposition for you. Just recently I was thinking of a way to market my consulting business in a costeffective manner and I realized I could do something that would be an excellent opportunity for you to gain enormous goodwill from your clients—while we both benefit. My name is Denise O’Berry and I’ve been a business consultant right here in Tampa since 1996. During this time I’ve been lucky enough to serve hundreds of small businesses. I am in the position to help you give your clients a very valuable service, which will greatly endear you to them without costing you a dime. Let me explain. I would like to send a letter from you to your clients. This letter will give your clients a coupon for a free consultation. I’m sure you understand how busy people are these days. Most small business owners wear so many hats, they often put issues on the back burner. This free consultation can help them see actions they can take right now to grow their business. Don’t you think that would be a great thank-you gift from you? And it won’t cost you a dime or take any of your time. In fact, I will pay 100 percent of the postage and printing costs. Plus, I’ll write the entire letter for you, and you will have complete editorial control. Please remember, this will in no way take away or compete with your services. I know you’re a smart business owner and thought it would make an excellent gift for your clients. There are no strings attached and your clients have no obligation to ever use my services again. If this sounds like a good idea—and it really is—I’d be happy to give you a free consultation so you can see for yourself how it can benefit your clients. Just call me at 813-671-5996 and I’ll explain everything in full detail. Best regards, Denise O’Berry P.S. Our businesses can create a win/win solution that will benefit your clients, you, and me. I look forward to hearing from you by December 18.


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THANK-YOU LETTER TO CREATE SALES AND REFERRALS

Dear Susan: I want to personally thank you for your recent purchase. I’m sure you’ll be very pleased with your Small Business Matters membership and how it will improve your business’s bottom line for many years to come. Because this is your first purchase, I want to do something special to show my appreciation. Here’s what I have in mind. For the next 30 days, I’ll give you a free month’s membership for every friend you refer who purchases a membership. That means you could get your membership absolutely free! One more thing. There’s no limit on how many people you can refer during the next 30 days. I’ll be frank. The reason I’m making this offer is to hopefully get you into the habit of referring to us. I know that once you experience our great customer service, there’s a 90 percent chance you’ll purchase from us over and over again, like many of our other regular customers. Simply put, I want your business and I’m willing to invest in you to earn it. I’m thrilled that you’ve become a member of Small Business Matters and want you to reap the rewards. If you have any questions at all, just give me a call at 813-671-5996. Best regards,

Denise O’Berry P.S. How does a completely free Small Business Matters membership sound to you? Simply refer your colleagues or customers our way and if any of them become members, you’ll get one month absolutely free (for every single customer!). What could be better than that? But don’t delay. This offer expires in 30 days.


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ENDORSEMENT LETTER (Sent by Your Customer to Their Customers)

Dear Joe: It’s rare that I write to you, let alone write about someone else. But I just had to share with you some of the exceptional things my business consultant, Denise O’Berry, has done for me. She saved me thousands of dollars by taking the time to help me put together an action plan for my business. Without her expert advice, who knows where I’d be? Headed in the wrong direction with my business, most likely. I told Denise I couldn’t keep her a secret any longer. So as a courtesy to me, Denise agreed to provide a thirty-minute consultation with you free of charge. There is absolutely no catch and there is no obligation to use Denise’s services again. This is just something I persuaded her to do because I was so impressed and thought you could benefit from her assistance just like I have. Just give Denise a call at 813-671-5996 to schedule your free consultation by June 5 and tell her I sent you. Best regards,

John Smith P.S. Just last year Denise saved me more than $5,000 by helping me put together an action plan for my business. See what she can do for you.


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BUSINESS IMPROVEMENT ACTION PLAN

Goals • Identify actions to increase sales and/or reduce cost. Place special focus on growing the catering side of the business. • Our financial goal is to reach $300,000 in sales for this year increasing to $500,000 in sales within three years. • Pay all partners $50,000 in gross salary per year. Current Cash Flow (Revenue/Expenses) Average monthly sales

$21,850

Average monthly expense

$22,238

Year end goal—Goal $300,000 Monthly sales target

$25,000

Monthly expense target

$22,500

Three-Year Goal—Goal $500,000 Monthly sales target

$41,700

Monthly expense target

$30,000

Marketing Current method of marketing is word of mouth and daily fax blast.


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Actions • Join at least one business/professional organization. Attend meetings. Get involved. • Kiwanis • Chambers of commerce • Rotary • Meeting planners • Develop a strategic alliance with businesses that target your market. Do not assign an employee to take these actions. • Contact office furniture suppliers. Suggest a catering promo / incentive flyer in each new/renewing customer package. • Contact area banks with promo for meeting catering services (office manager/vp). • Contact meeting/event planners to promo services. • Build special catering menus around holidays such as Father’s Day, Mother’s Day, Graduation, Fourth of July, Labor Day, Veterans Day, and so on. Notify all store patrons, strategic alliances, and current catering customers. • Consider sponsoring a Little League team for name recognition. • Participate in “Taste of . . .” events. • Promote on the Internet. • Place a fishbowl or basket on the counter to collect customer feedback forms. Incent customers to submit forms by giving away a FREE lunch a month. Set a specific day for the drawing such as the second Tuesday of each month. Keep track of who wins. Post winners in the store—“Our FREE lunch winners are (Name, name, name). You could be next! Just fill out a comment card and place it in the fishbowl.” • Create your menu specials for the week and fax once a week rather than once a day. This will save you planning time and gives your customer an idea of “when I want to eat there.” Always add some type of message about your catering on your fax blast.


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• Get small business card size magnets that promote your catering service and stick on your delivery truck. Allow anyone to remove them. Public Relations (PR) No current PR activities in place. Actions • Build relationships with food editors/journalists for local newspapers. • Proactively seek reviews from newspaper and TV media. • Create and submit at least one news release a month to targeted media. • Create a Big Bomber card. Give to all customers. Buy 10 Bombers, get one FREE. Mark card each time a Bomber is purchased. Customer Relationship Management (CRM) No current CRM activities in place. Currently have a few store customer feedback forms and order information for past catering customers. Actions • Revise customer feedback form to include the following items: • Fax—May we fax our special menus to you? Y/N • E-mail—May we e-mail our special menus to you? Y/N • May we use your comments in our promotional materials? Y/N • Use Fishbowl and Big Bomber card to motivate customers to buy. • Enter all catering customers and related order information into a database (Access/Excel). Use to track purchases, maintain contact, and provide ease of ordering for future orders. • Enter all customer feedback forms into a database. Use to promo special catering opportunities, to keep in touch and notify of weekly special menus.


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• Leverage current catering customers as a referral source by asking, “Whom do you know who could use our catering services?” • Consider an incentive for catering customers to return such as a “5 for 10” promo. Place five catering orders, get $10 off your sixth order OR incent the customer by saving them the delivery fee such as, “3 is FREE” Delivery of the third catering order incurs no delivery fee.


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Recommended Reading Bennett, Bo. Year to Success. Sudbury, MA: Archieboy Holdings LLC, 2004. If you have a year, this book has 365 days of advice for you. Intended to be a complete guide on your business journey, each day includes recommended action steps to help you accomplish your goals. Fox, John M. Marketing Playbook. Downers Grove, IL: EagleCross Publishing, 2005. Like football? This book uses the football play structure to help you implement 102 of the best marketing plays to get your sales team across the goal line. Gerber, Michael E. E-Myth Mastery. New York: HarperCollins, 2005. A perfect continuation of the E-Myth concept continues in this book and will help you take your business a step further. Gerber, Michael E. The E-Myth Revisited. New York: HarperCollins, 1995. Every small business owner who started out as an expert in their craft needs to read this book. It will help you transition from being a technical expert in your business to being a true business owner. Kaplan, Steve. Bag the Elephant. Austin, TX: Bard Press, 2005. If your target is huge companies, this book is a must read. It will help you put together a game plan for acquiring and keeping big business customers. Levinson, Jay Conrad, and Al Lautenslager. Guerrilla Marketing in 30 Days. Irving, CA: Entrepreneur Press, 2005.

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RECOMMENDED READING

Take a 30-day plan and break it down into actionable steps you can implement to pump up your marketing and you’ll find this book. Put it to work and you’ll improve your business results. Moss, Wes. Starting from Scratch. Chicago, IL: Dearborn Trade Publishing, 2005. If you like to read stories about how other entrepreneurs have overcome obstacles in their business, this book is for you. A lot of lessons can be learned from the 21 entrepreneurs who are highlighted. Yudkin, Marcia. 6 Steps to Free Publicity. Franklin Lakes, NJ: Career Press, 2003. You should have a dog-eared copy of this on your desk. There are numerous ways to capture the free publicity you deserve for your business and this book tells you how. Teten, David, and Scott Allen. The Virtual Handshake. New York: Amacom, 2005. It’s way past time for you to take your business and your networking to the Internet. Close the gap on your learning curve and learn how to make the most of your online networking experience by following the advice in this book.

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Web Sites to Visit Business.gov www.business.gov The official business link to the U.S. government. Direct entry to information, forms, and assistance for launching, managing, and growing your business. DinkyTown www.dinkytown.net Online financial calculators to determine breakeven analysis, cash flow, working capital, inventory analysis, and more. Grants.gov www.grants.gov The single access point for more than 1,000 grant programs offered by all federal grant-making agencies. Internal Revenue Service (IRS) www.irs.gov Access to everything you want to know about tax administration obligations for your business. Service Corps of Retired Executives www.score.org Confidential online business advice service along with a learning center and business toolbox. This service is associated with the SBA.

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WEB SITES TO VISIT

Small Business Administration (SBA) www.sba.gov Articles and frequently asked questions along with learning libraries and step-by-step documents to help your business. They also offer a free online consulting service.

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Index A Accountants, 11–23. See also Accounting system alternatives to, 22–23 choosing of, 11–15 interviewing of, 15–17 working with, 18–22 worksheets for selecting, 13, 150–152 Accounting system, 27–36. See also Accountants cash or accrual method of accounting, 28–29 importance of, 4 sample flow of money and, 35–36 standard reports of, 29–33 terminology of, 34–35 Accounts payable, defined, 34. See also Expenses Accounts receivable. See also Invoices defined, 34 sample, 36 as source of cash, 41–43 Accrual method of accounting, 29

Action plans: for business improvement, 190–193 for customer contacts, 106, 181 strategic, 18–22, 85, 171–173 Advertising, 139–140 Affiliate marketing, 137–138 Assets: on balance sheet, 30–32 defined, 4

B Balance sheet, 30–33 Balestrieri, John, 45 Bank statements, 28 Benefits, reducing costs of, 94 Bookkeepers, 22 Breakeven point, defined, 35 Brownfields Economic Development Initiative (BEDI), 48 Budget, 53–68 data for, 56–58 as decision-making tool, 60–68 importance of, 53–55 monitoring of, 59–60

199


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200 Budget (Continued) sample, 58 time frame for, 55 worksheet for, 59, 163 Business processes. See also Organizational structure documenting, 96–99 improvement action plan for, 190–193 Business state of affairs worksheet, 150

C Call to action, in direct mail, 142 Cash, sources of, 39–50, 83–114 from within business, 41–43 cash inflow processes and, 85–88 cash outflow processes and, 88–93 cost centers and, 93–95 customers and, 100–114 employees and, 99–100 equity partners, 46 grants, 47–48 loans, 39–40, 43–46, 48–50, 145, 153, 158–162 operations processes and, 95–99 strategic action plan and, 85, 171–173

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INDEX

Cash flow: problem areas of, 5–6 statement of, 33 Cash inflow. See Invoices; Sales Cash method of accounting, 28–29 Cash outflow. See Expenses Chandler, Stephanie, 12 Collections, 6, 43. See also Invoices Compensation, moderating, 93 Competition: evaluation of, 20 pricing and, 73, 77 Conservation Innovation Grant Program, 47–48 Contact action plan, for customers, 106, 181 Contests, marketing and, 108 Cost centers, 93–95 Cost of goods sold, defined, 35 Cost plus profit margin, pricing and, 73 Credit cards: accepting, to manage cash flow, 87–88 FTC facts about, 154–157 using, to manage cash flow, 44 Current assets, defined, 32 Customers. See also Marketing checklist for building loyalty of, 113–114 contact action plan for, 106, 181


10/31/06

10:50 AM

Index exceeding expectations of, 100–102 form for tracking, 180 keeping records of, 103–106 knowing costs of, 102–103 lifetime value of, 78–79 pricing and, 76, 78–79 reactivating lapsed, 184–185 reasons to contact, 106–109 referrals from, 107, 135–137, 188 service and, 111–113 staying in touch with, 109–110

D Direct mail, 140–143. See also Mail, to customers Discount, offering to fast-paying customers, 87 Drum, Brian, 84 Drum Associates, Inc., 83–84

E E-books, 124–125 Elsaadi, Pamela, 46 E-mail marketing, 110, 134–135 Employees: controlling hidden costs of, 93–94

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independent contractors contrasted to, 91–92, 175–177 making most of, 90–91, 99–100 organizational assessment and, 178–179 Endorsement letter, from customer to customer, 189 Equity: on balance sheet, 33 defined, 4 Equity funding, 46 Expenses, 4. See also Accounts payable in budget, 56, 57 controlling, 93–95 pricing and, 6 reducing, 88–93 EzineArticles.com, 126

F Face-to-face networking, 130–134 Factoring, 41–43 Federal Trade Commission credit card facts, 154–157 Fees: for accounting services, 14, 16–17 for bookkeeping services, 22 collecting up front, 85–86 for credit cards, 154–157


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202

Page 202

INDEX

Fees (Continued) for factoring, 42–43 for home equity loans, 159 Fixed assets, 32 Flemming, Suzette, 12

G Gillett, Dudleigh, 89 Glasgow, Bob, 18 Goals, setting with accountant, 19, 21 Government money, 40 Grants, 47–48

Internet: e-mail marketing and, 134–135 networking on, 127–130 publishing on, 126 web site on, 134 Interview, of accountant, 15–17 Inventory: controlling of, 89–90 defined, 34 Invoices. See also Accounts receivable aging of, 86–87 defined, 34 selling to generate cash, 41–43 IRS Form SS-8, 175–177

H J Healthcare benefits, reducing costs of, 94 Hidden cash. See Cash, sources of Home equity loans, 45, 158–162 Human resources. See Employees

I Income statement, 29–30 sample, 36 Independent contractors, 91–92 Intangible assets, 32

Joint ventures, 124–125 Jordan, Caroline, 16

L Liabilities. See also Expenses on balance sheet, 32–33 defined, 4 Line of credit, 44–45 Loans: to cushion cash flow, 39–40, 43–46, 48–50


10/31/06

10:50 AM

Index home equity loans, 145, 158–162 Small Business Administration loan questionnaire, 153

M Mail, to customers, 109, 110. See also Direct mail; E-mail marketing endorsement, 189 feedback form, 186 letter to reactivate, 184–185 thank-you postcard, 183 Marketing, 117–146 with advertising, 139–140 with affiliate marketing, 137–138 costs per customer of, 102–103 with direct mail, 140–143 with e-mail, 134–135 with face-to-face networking, 130–134 with joint ventures, 124–125 mistakes most commonly made, 119–121 with online networking, 127–130 with press releases, 144–146 with referrals, 135–137 with speaking engagements, 127

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with strategic alliance partnership, 124, 125 strategies for, 5, 122–124 with web site, 134 with writing and publishing, 126 MarketingExperiments.com, 80, 164–170 Markup, pricing and, 77 Maroney, J.P., 118–119 MYOB accounting software, 23 Mystery Shopper’s report, 112–113

N Networking: face-to-face, 130–134 online, 127–130 Newman, Dee, 90 New projects, using budget when evaluating, 61–64 New purchases, using budget when evaluating, 67–68 Newsletters, for customers, 110

O Online networking, 127–130 Operations processes, adjusting for better cash flow, 95–99


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204 Organizational structure, 95–96. See also Business processes sample assessment of, 178–179 sample organizational chart, 174 Outflow of cash. See Expenses Outsourcing, 91–92 Overhead, pricing decisions and, 72

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INDEX

Publishing and writing, marketing and, 126 Purchases, using budget when evaluating new, 67–68

Q QuickBooks accounting software, 23

R P PayPal, 87–88 Peachtree accounting software, 23 Peaks and valleys of sales cycle, managing with budget, 64–67 Press releases, 144–146 Pricing, 71–80 components of, 73–74 customers and, 76, 78–79 of hard products, 77 methods of, 74–76 of soft products, 77–78 testing of, 79–80, 164–170 Profit, relation to cash flow, 3–4. See also Pricing Projects, using budget when evaluating new, 61–64

Receipt, defined, 34 Receivables. See Invoices Record keeping. See Accounting system Referrals: strategy for using, 135–137 thanking customers for, 107, 188 Revenue, 4

S Salaries, evaluation of, 93 Sales. See also Pricing in budget, 56–57 budgeting for peaks and valleys in cycle, 64–67 finding hidden cash in, 85–88 marketing strategy and, 5


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Page 205

Index Signature file, online, 128–129 Small Business Administration loan questionnaire, 153 Speaking engagements, 127 Special offers, for customers, 108 SS-8 (IRS form), 175–177 Strategic action plan, 85 creating with accountant, 18–22 template for, 171–173 Strategic alliance partnerships, 124, 125 affiliates and, 137–138 free offer letter for, 187 online networking and, 128 Styles, Carmella, 39–40 Surveys, of customers, 109, 182 sample form, 186

T Target market: marketing and, 119–120 pricing and, 73 setting goals with accountant and, 21 Taxes, 94–95 Telephone calls, to customers, 109

205

Testimonials, in direct mail, 141–142 Thank-you notes, to customers, 107 sample, 183, 188 Time-based pricing, 74–75 Typical workday, analyzing, 20

V Value added, pricing and, 73 Value-based pricing, 75–76

W Web site, 134 Worksheets: accountant data, 152 accountant requirements, 13, 151 business state of affairs, 150 cash flow budget, 59, 163 organizational assessment, 178–179 strategic action plan, 171–173 Writing and publishing, marketing and, 126

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