The past couple of years have been an especially challenging time for most business owners as they’ve struggled to maintain sales and profitability in the face of one of the worst economic downturns in our nation’s history. As a result, many owners and entrepreneurs have been only too glad to say goodbye to 2009 and welcome in a new year.
As you set your sights on 2010 and make plans for growing your business in the decade ahead, first make sure you aren’t carrying any old baggage along with you. Here are five common mistakes that were made by many small business owners during the economic downturn. If any look familiar to you, resolve to correct them now so you can begin the New Year, and the new decade, with a fresh start:
1. Have a sale on your highest-volume, lowest-margin products. After all, you know you will sell a lot of product this way, right? While this might be a great way to boost your sales, it will also lower your gross profit, as well as the value perception of your product. If you don’t know your gross profit margins by product, you could be doing this without even knowing it.
This strategy is the exact opposite of what you should do, which is to focus your sales efforts on your high-margin products and offer something extra to customers that doesn’t cost you a lot to provide, like free shipping or express order processing. The key is to devise a discounting strategy that doesn’t undermine your pricing structure and condition your customers to expect lower prices in the future.
2. Hesitate to borrow from your bank credit line to finance your cash flow needs. Sometimes, owners are afraid to tap their lines of credit for fear the bank will make demands they don’t want to honor. However, financing cash flow is exactly what your credit line is there for, and this may be the perfect time to use it.
By borrowing wisely, you can help make sure your management team spends its time doing things that make your business better, rather than struggling with unnecessary cash flow issues. Just make sure your borrowing needs are temporary and your business will be able to pay the money back when things pick up again. Note: Using a credit line to finance losses is a bad idea unless it buys you extra time to turn the losses around and you have an active program in place to do that.
As an aside, there are banks out there that are willing to lend money today, despite what you might hear on the news or read in the paper. Many community banks, in particular, are looking for businesses with good management, solid business plans and strong financials that want to borrow money.
3. Don’t press your customers for payment of overdue balances. Small business owners can be hesitant to pursue collection of past-due accounts receivable for fear that they’ll alienate customers or make them angry. However, avoiding active collection efforts so you don’t make customers mad is taking responsibility for their problems at the expense of your company.
This comes down to a balancing act between your good customers who may be experiencing temporary cash flow challenges and your traditionally slow-paying customers whom you tolerate in good times but can’t afford in bad times. Use this opportunity to collect as much as you can from the deadbeats and then drop them—so you can focus your energy on serving your good customers better.
4. Neglect getting regular reports on cash flow. Common complaints are that “it’s too much work getting these from accounting” and “they’re too hard to read anyway.” However, neglecting to regularly receive and scrutinize accounts receivable and accounts payable aging reports, bank account reconciliations and short-term cash forecasts is asking for trouble.
These reports will tell you where your cash is, where it’s going, and where you need to put effort into making changes—speeding up collections and/or slowing down payments, for example. This is essential information in good times, but in bad times it’s absolutely critical.
I was recently interviewed on my friend Jim Blasingame’s small business radio program, The Small Business Advocate Show, and this is what he had to say about neglecting cash flow reports: “It’s like driving the wrong way down a one-way street at night in the fog.” I can’t describe it any better than that! Jim added that, in his opinion, the small business failure rate in this country could be cut in half if all owners regularly received and reviewed cash flow reports.
5. Give your customers cut-rate prices when they ask for them (and they will!). Your customers want to reduce their costs, of course, but often without doing anything differently themselves. They’d rather you just cut your prices. But if you agree, you will be funding their inability to manage their business properly, to the detriment of your business. Instead, give your customers tools and techniques to enable them to better pass on their costs to their customers by selling value rather than price.