I have had an exciting time over the last couple of weeks working through financial plans with three excellent, established businesses that just needed a tweak in direction.
Each of the businesses are run by owners who are very knowledgeable about their business areas and run very good businesses. However, the businesses were just not delivering the income the owners needed.
I find that the reason for this can often be entrenched assumptions about how the financial side of the business should be run.
For example, pricing can often be a problem area. Many businesses will cost their products/services on a cost plus basis. This at least ensures that costs are covered (as long as they are fully aware of all their costs, which should include the owners’ salaries) but takes no account of the market value of the product/service. This leads to undercharging.
Also the method of pricing often has more to do with supplier’s way of working and assessing value, than it does the customer’s. It is important to review pricing structures to ensure that they match the way your customers think about the product/service you are supplying.
Pricing by the hour may be easier for you, but if it is irrelevant to your client how much time a job takes, as long as the job is done properly and within the agreed budget, it is not terribly relevant. It can often be more relevant to charge for the task done.
Another assumption which catches people out is that services should be billed at the end of the month in which the service is delivered and the money collected 30 days after that.
This assumption has lead many small businesses into liquidation and is JUST NOT TRUE.
Unless you are a bank, you should be giving as little credit to your clients as you can – certainly there should be a good business case for any credit given and proper credit checking of those clients given time to pay.
By changing the way invoicing and debt collection is done businesses’ liquidity can be improved overnight.
So don’t just continue doing what you have done before if it is not working – have a shake up!