Diversifying Your Small Business – Part 2

In part one of Diversifying Your Small Business I addressed the factors that impact your business’s need for change. The “Why” and “How to” factors driving this need for change were covered in detail. Finally, it was made clear that because of the ever evolving trends in business, business owners must get on board or fail in their endeavors.

In the second part to this diversification concept, I will address in more detail some of the areas business owners need to work on in order to meet these growing demands. Without addressing these key areas of business development, the cost to your business includes losses in both your customer base and income level.

Your Small Business as It Is Today

You might currently be operating your small business with negative cash flow or you might only be breaking even. If so, you might not notice the new demands on your business because you are not following the changing trends or regulatory enactments. You might be too busy just trying to stay afloat and think you cannot come up for air. Being the head cook and bottle washer of your company does not leave you with enough time to keep up with much else. Effectively accomplishing the necessary changes as listed below will allow you to develop and grow your business.

1. Business Plan – Operating your business on the basis of a business plan that was written 5 or even 10 years ago is not acceptable. If you have not looked at the plan in a long time, then now is the time to go back to the drawing board. If you do not have a business plan, I would recommend you consider getting one done now. Writing a new business plan or revising an old one will get you to think about the areas in your business that are coming up short. Remember, the business plan is your road map to business success.

2. Cash Flow Management – Managing your business’s cash flow is the life force of your business. You might think you have great products or services, but if your customers are not buying, then how great are they? Without paying customers, you are maintaining an expensive hobby. Addressing your operating expenses can also improve the net cash flow. Review your monthly Cash Flow Projections and determine what you would like to be making over a given period of time. Then compare the projected figures to what is actually happening on a weekly or monthly basis. If the numbers are far off, then this exercise should give you some ideas as to where your business model needs adjusting.

3. Payments – Understanding the term “Time Value of Money” is vital. This concept affects your bottom-line. When cash is not flowing into your bank account, you cannot cover your operating expenses or increase that rainy day fund. Implementing strategies such as early pay discounts can help. With more businesses taking longer to pay their outstanding invoices, using financing options such as Factoring (the sale of your outstanding accounts receivables-invoices) can alleviate disaster and save your business. We can agree that it is better to have your money today than having to wait 30, 60, or even 90 days to get paid. Think of the ramifications of not acting quickly and no money coming in.

4. Pricing – This is an area where many small business owners fail. The price points of 10 years ago are not applicable today. There is an art to pricing your products and services. You must flow with the changes affecting your business. Wanting to get customers in the door by being the cheapest on the block is not necessarily the most successful way to go. Being the most expensive can also deter your growth. If your products and services cost of goods figures are too high, this will negatively impact your cash flow balance. So be sure you are pricing your products and services to meet your needs.

5. Customer Retention – Knowing the heart of your customers might not always be easy to figure out. Identifying ways to keep your customers coming back is important to the longevity of your business. Use creative strategies to thank your customers, remembering important dates such as when they first became customer, their wedding anniversaries, or birthdays. If they took a long vacation consider sending them a welcome back card. Send them a handwritten “Thank You” note directly from you stating how much you appreciate them. Doing this will make your customers feel valued and it will make you feel good in the process.

6. Products or Services – This is probably the most important section of all 6 topics. Why? Do you currently offer only services or just products? If you are a business owner providing only services, you had better seriously start thinking of ways to implement a product division to your business. On the other hand, the same goes for those businesses only providing products. You are losing out on sales/income by only targeting one aspect and not both. When you have multiple ways of getting paid, this just makes sense.

Remember the term, “Multiple Streams of Income”? This is how you implement and start building on your income streams. Figure out how you can improve your business cash flow and start taking the necessary actions that can make the difference between success and failure.

When considering the diversification of your business, be sure to look at your strengths, weakness, opportunities, and threats, (S.W.O.T.) and address them head on. Do not allow the fear of change to paralyze you from taking your small business to the next level.

The 7 Biggest Financial Mistakes Businesses Make

Running a business should earn you an honorary degree given all you will learn, says Brian Hamilton, co-founder and CEO of Sageworks.

By Brian Hamilton

We live and we learn. In the time it’s taken me to build two companies, I have learned and more importantly, lived, these mistakes. I hope these pieces of advice can help both aspiring and existing entrepreneurs succeed in starting and running their own businesses. Here are the CliffNotes, the mistakes you should hear now and avoid.

1. Hiring in advance of revenue. There is a common expression: “Don’t count your money until it is in the bank.” There is great wisdom in this. Many times in business, we receive contracts or the promise of revenue. However, there is a major difference between having revenue and almost having it. Until revenue actually hits the bank account, you don’t have it, and you must overcome the tendency to be optimistic and hire too many people before the revenue is real. This one principle or mistake could be its own manifesto.

2. Borrowing money when you don’t really need it, but when the bank is willing to lend it. Just because a bank is willing to lend you money does not mean you should accept it. The bank is in business to collect interest and not to optimize your financial performance. Sometimes these two goals meet somewhere near the middle, but it is not as often as you might think. It’s not that bankers seek to take advantage of business people; it’s only that their objectives and yours are very different. In general, borrow as much as you need to grow your business. The problem with credit is not that there is too little available; it is that people get too much of it. Borrowing money adds a huge burden to your business, a stress that can often cascade into your personal life.

3. Not paying payroll taxes on time. I have known few businesspeople who have completely avoided this mistake, but it always creates unnecessary anxiety. When you pay employees, you collect a portion of their money on behalf of the government. Essentially, you are a collection agent. This is a tremendous liability and responsibility for employers that did not exist years ago when employees had to deduct their own taxes and pay them to the government. Alas, these days are over. When you hire an employee, you are also agreeing to help them pay their personal taxes, a major responsibility. Here is how this problem crops up. The employer cuts payroll checks but does not immediately set-aside the payroll liability in an operating account that is separate from the account they use to pay other operating expenses. The funds are mingled, and the person running the business has an inflated view of his or her cash balance. It is not that the employer is being dishonest or intentionally withholding the tax revenue; they lose track of the liability. Later, employers try to play catch-up, but because there is almost never as much cash available as you would like in a privately-held company, the taxes accrue and problems start severe penalties and interest. One solution is to keep two, separate accounts: one for regular operating expenses and the other for payroll taxes. Another solution is to simply use a payroll service that will give the liability its due attention.

4. Pricing too low. Unless you are Walmart or are trying to be (and have a real hope of achieving this), it is almost always better to sell fewer units at higher prices than to sell more units at lower prices. High prices protect your margins and also enhance your brand. Even 5-10 percent price increases can make a significant difference to the bottom line. I believe that, at any given time, 20-30 percent of businesses in a given market cannot possibly make a profit at their current prices—they are simply too low. In a way, these businesses have set themselves up unknowingly as nonprofit organizations. Conduct deep industry research on pricing, and then price at or near the market average—maybe even a little above it. When people start a business, they tend to price low to differentiate their offer. Instead, spend time and develop a real product or service differentiator so you can command higher prices. If you price low at the start and then later have to charge more as your operating costs grow (which they always do), you will offend and lose many of your early customers who think the increase is unfair. Price for decent margins, build and protect a real brand, and maintain your customers to build your franchise.

5. Permitting accounts receivable. Unless there is a good reason, you should not offer credit terms to customers. When you offer credit, you are now a bank and a service or product provider rather than just a service or product provider. It is rare that businesses fail because of profitability (most entrepreneurs know they need revenues to exceed costs); more often businesses fail because they cannot collect receivables and manage cash. Offer credit only when you must do so, and many businesses don’t need to. This goes against commonly accepted practices, but I have seen so many businesses fail due to poor cash flow management that I flinch every time I see smaller businesses offering credit. I realize that everyone reading this will think they need to offer credit to customers, but probably only 25 percent really need to. There is an old inventory management maxim: “Inventory kills.” This is wrong; it should be: “Inventory hurts, but accounts receivable really kill.”

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