How 80% and 20% Equal 110% Performance

No this isn’t new math, or even fuzzy math – I like to call it Optimization Math! The type of math every small business owner should do to get more bang for their buck. Two of the biggest challenges I hear from small business owners are 1) they wear too many hats, and 2) there is simply not enough time in the day to get everything done.

This dilemma often leads to frustration, anxiety, and despair. I’m sure all small business owners have felt that way at one point or another. And I’m sure that most of the time that feeling comes from trying to do 100% of everything, 100% of the time, and with 100% success. Now that’s what I call fuzzy math! I think you will agree when you look at that formula – it just doesn’t add up. Yet, as small business owners, we sure try to make it work every day anyway.

If you agree with Albert Einstein that, “the definition of insanity is doing the same thing over and over again and expecting different results”, and you are ready to try a new approach – let’s take a look at that Optimization Math.

The 80/20 Rule, also known as the Pareto Principle, posits that 20% of causes are responsible for 80% of effects. Put another way – 20% of your efforts are responsible for 80% of your results. Viflredo Pareto, an Italian economist in the 1800’s, observed that 80% of his country’s wealth was owned by 20% of the population. This observation has since been noted to apply in many aspects of our lives. For example, you wear 20% of your clothes 80% of the time and you hang out with 20% of your friends 80% of the time.

In your business you will find the following is often true:

• 20% of customers are responsible for 80% of sales
• 20% of products are responsible for 80% of sales
• 20% of sales are responsible for 80% of profits
• 20% of employees do 80% of the work
• 20% of employees are responsible for 80% of problems

I have personally done this analysis in many businesses from varied industries – and the principle always holds up. Not always exactly 80/20 – but an imbalanced ratio of input and output somewhere near there. In other words, you won’t see 100% of product responsible for 100% of sales, or 100% of employees contributing 100% of work. While we get that intuitively, somehow we still expect to be the exception to the rule! There’s that definition of insanity again.

So how do we use this principle to get to that elusive 110% performance?

First, you must identify what the 20% are. I do an exercise with my clients where I ask them to write down everything they do at work for a whole week. Normally they don’t complete the task – of course, because they are too busy doing everything to record the doing! So we sit and complete it together, and then I have them indicate the percentage of time they spend on each task.

We then sort each task into ABCC1 categories as follows: A) Duties only you can perform, B) Duties you need to review and approve, C) Duties you only need to be informed of results, and C1) Duties you only need to be informed of unacceptable performance. Would you be terribly surprised to learn that most of the small business owner’s time is spent on “B”, “C”, and even “C1” tasks? Meanwhile, the “A” tasks, which impact the company most, go largely unattended – if not entirely left off the list!

Those “A” tasks are the 20% of efforts that give the company 80% of results. So select and sport the vital 20% of hats in your collection and let others in your company wear the other 80%. This is called effective delegation. If no one in your company has the skill set or time then consider outsourcing.

By focusing on the 20% you can perform at 110%. It’s the difference between specialization and a “jack of all trades, and master of none”. Which one do you want to be? Which one benefits your business the most? Which would you enjoy more?

Mark A. Sandate is a speaker, author, and founder of MASSolutions, LLC – a business advisory firm specializing in small business growth. For more information, and to inquire about our workshops and/or a free business consultation please email MASSMyBiz@mas-solutions.biz.

Small Business Prosperity in a Down Economy

Three winning strategies!

Whether it’s declining sales, increasing costs, decreasing cash flow, or a combination thereof – small businesses are feeling the impact of a down economy. With limited access to capital, the small business will not make it, and the small business owner’s lifestyle will suffer as a result. That’s the bad news. The good news is that small businesses can be much more flexible and reactive than big business. You can adapt to a slowing economy much quicker, and improve your odds of not only surviving, but coming out stronger on the other end. Here are three winning strategies to beat a down economy and protect your lifestyle:

1. Tighten your belt, Plan for Profit, and Optimize Cash Flow.
Tighten your belt. You are likely already doing this at home – eating out less, delaying major purchases, etc. Do the same in your business, take a hard look at last year’s financials, and identify what can be cut this year. Start with “luxuries” (coffee service, etc.), then turn your attention to paying less for the same (shop insurances, cell phones, etc.). Finally, take a look at what you can make do with less of – supplies, vehicles, and yes – even employees. Remember, the survival of your business is at stake here, if the company fails, then everyone is out of a job – including you!

Plan for Profit. After reducing your costs and freezing them, make sure your revenue level covers overhead to ensure profitability. It’s never a good idea to just let profits happen to you – but especially so in a down economy. Set a realistic sale’s goal, perhaps based on last year’s level – then see what happens if you reduce it by 10%, and 15%. Will you still make a profit? If not – go back to the cutting board!

Optimize Cash Flow. If you are going through tough times – it’s likely your customers are too, and that will be reflected in your accounts receivable aging. Have a consistent credit and collections plan – your first call should be a customer service call before the invoice is due, and another immediately following the invoice due date. Remember the squeaky wheel gets the oil. And despite your desire to increase sales, be very careful extending credit – do your due diligence first. Also, take a look at inventory, liquidate dead items and unfreeze your cash!

2. Differentiate or Die! As the economy shrinks, so does your market, and so does your piece of the pie. It is more important than ever to make your offerings standout in a crowd of look alikes. Why should customers buy from you, instead of your competitors? If you don’t know – just ask them! Compile and sort by the most common answers, as they say – the cream will rise to the top. The top reasons they buy are indeed what make you different – now get out there and shout it from the mountain tops. Use monies saved from cost cutting and invest in a marketing campaign trumpeting your difference. Companies that do this very well actually experience growth in a down economy!

3. Improve productivity & efficiency by increasing morale. Hard to do when taking away their coffee service, but what’s even scarier to your employees is the insecurity of a struggling company. Share with them your efforts to improve the business, solicit ideas for savings and revenue opportunities. It’s easier to accept losing their cell phones when the idea comes from them as a group. More importantly, it gives them a sense of control over their own livelihoods. If they help the company survive, they survive too!

In summary, it’s up to you. You can go with the bad news or the good news. You have no control over the bad news (the economy), but you do have control over the good news (your business) – so the choice is obvious. Implement sound financial practices, differentiate your offerings in the market place, and get your employees to help. Before you know it the economy will be re-entering a boom cycle and you will be uniquely positioned to prosper from it!

Mark A. Sandate is a speaker, author, and founder of MASSolutions, LLC – a business advisory firm specializing in small business growth. For more information, and to inquire about our workshops and/or a free business consultation please email MASSMyBiz@mas-solutions.biz.

Facing your Limitations – The Greatest Business Lesson I Have Ever Learned

Long distance runners are familiar with the term “hitting the wall”. The point in a race when you literally hit a wall of extreme fatigue. Your body suddenly feels very weak and you are unable to run at your normal pace, if at all. If you have never hit this wall before, it will usually mean the end of the race for you. The solution is to train the body by running a number of long distance runs into that zone, and by introducing carbohydrates into your system at the right times.

So what’s the lesson here for the small business owner and entrepreneur? It’s about knowing your limitations. And not just knowing – but experiencing “hitting the wall” of your limitations. It personally has been the greatest business lesson I have ever learned. No, I didn’t appreciate it at the time – and I certainly did not like running smack into my wall of limitations – especially when I didn’t know it existed!

It was painful, and it was debilitating. My confidence was shaken to the core. Everything I had ever believed about myself was in question. Do I really have what it takes? Are my business theories and strategies incorrect? Are my leadership skills lacking? Am I in over my head?

Certainly not questions we ask ourselves when in the throes of success! Nope, these questions only eat at us in our lowest of moments. And as painful as they are – the answers are vital to our growth.

Show me an entrepreneur and I will show you someone who has at some point experienced failure due to their own limitations. Mine came while at the helm of rapidly growing business. Through several merger and acquisition maneuvers, and standing up a new division, revenues increased in just one year by a million and a half. Good stuff right!?

Not so good actually. We were a speeding train gaining more and more momentum and market share, the problem is I was still laying down the rails to keep us on track. Yes, we were a runaway train. Yet, instead of slowing down, I kept going full steam ahead, convinced I could just work longer and harder and stay one track ahead of the train. Predictably – I could not. I lost control of the business and just as fast as we had grown, we began to fail.

Was that my wall of limitations? Yes, but never having seeing it before I didn’t recognize it for what it was. Instead, my first reaction was to keep my legs moving underneath me to grow the business again. It wasn’t until I realized that though it felt like I was churning my legs harder than ever – I was steadily losing ground. That’s when I “hit the wall”.

I came to a dead stop.

Not because I wanted to, but because I literally could not continue. I was forced to sit and stare at my wall of limitations. The choice here is to admit defeat – or to learn. I chose to study my limitations, become intimate with them, and then got down to the serious business of learning how to overcome them. To be very clear here – overcoming your limitations is not the same as erasing them! Some you will, but some will always be there. Like the runner’s wall – no matter how many times they run the marathon – they still hit the wall, they just have figured out how to get over it! You can too!

Your business journey is not a sprint, it’s a marathon. Prepare yourself to overcome “the wall” by learning your limitations, accepting them, and even embracing them. Now you know what could potentially prevent your success. Turn that knowledge into solutions and you win the race. That’s working smarter – not harder!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

Is it Time to Repot your Business?

Question: If you reach one million in revenue by following a certain system and infrastructure – would you change the system and infrastructure to reach your second million?

Answer: Of course not! If it ain’t broke don’t fix it!

Okay, let’s try this again…

Question: If your plant grew to one foot inside its current pot, would you change the pot so it could grow another foot?

Answer: Duh! Of course I would!

So what if I told you your business is the plant, and your organizational infrastructure – the people, systems & processes are the pot.

Because of your diligence and commitment to watering and fertilizing your plant – it grows and grows. Accordingly, you pat yourself on the back and admire your green thumb. Your plant continues to grow healthily to a certain point in its initial pot.

Eventually, however, the plant stops growing and maybe even starts to die – instead of recognizing that the pot is now too small and is preventing further growth – you try to force the plant back to health by doing what worked the first time – you add more water and fertilizer!

This time the plant refuses to respond and you can’t understand why the same actions are not providing the same results. It just doesn’t follow that the environment and formula for growth the first time – aren’t working this time. So then you start looking at external forces to blame, maybe it’s the tap water – or maybe there is a parasite eating at my plant?

On that point, allow me to digress for a moment; for my one year anniversary I bought my wife a bonsai tree to keep on her desk – if I remember correctly I said something romantic like “so that you can watch the flower blossom year after year just like our marriage”. I know – smooth right!? Well hopefully what happens next isn’t indicative of my marriage’s fate – but, well, let’s just say that my wife is no green thumb.

One day she calls me up and informs me that her office mates took a vote and the bonsai tree had to go – it seems that it was attracting a swarm of flying critters! She blamed these same critters on the demise of her tree – saying they must have killed it by feeding on it. So unless I had any ideas on how to get rid of the bugs – the bonsai was bon voyage!

So I did as any good business consultant would do when we don’t know the answer – we research it (thank heavens for Google!). Turns out the bugs weren’t killing the tree after all – the tree was actually dying and rotting on the inside from over watering. The rotting wood and roots is what was attracting the bugs to feast!

Moral of the story? When your business is affected by outside forces (i.e. market conditions, competition, etc.) the first place to look for problems is within the business – not outside of it! A strong healthy business can withstand an assault from outside (a slow down in the market, natural disaster, etc.), but a sickly business will be eaten up by the bugs (its competition, liability, etc)!

This brings us back to your plant, so when it is obvious that the business has outgrown its pot, why is repotting the last thing we think of? It’s amazing how quick small business owners will invest and upgrade the physical building we operate out of as soon as it becomes apparent it can no longer sustain our business activities – and yet we are so slow and reluctant to upgrade the organizational infrastructure of our business! Why is this?

Perhaps it’s because the skill set required to develop an organizational infrastructure, with systems and processes geared towards productivity, simply falls outside the collective entrepreneurial genetic code. It’s just not what entrepreneurs are made of! Growing plants is fun and exciting – that weeding, trimming, repotting stuff (read: management) is for the birds!

So the small pot – the one you started with – was one that came somewhat intuitively. It basically can be called the “Getting my product/service to market” pot. It’s an infrastructure created with the following primary concerns in mind: 1) Get Customers, 2) Get Products/Services to customers, and 3) Get Paid. This is not something you spent hours analyzing and flow charting! You just did it and as you grew you showed others how to do it and unwittingly created a system.

This basic infrastructure works well enough, as your focus at this time is on growing the plant. And the plant does grow. So much that it cannot grow any further until you provide an improved pot – an improved infrastructure for it to grow in! And this is where the entrepreneur/small business owner runs into trouble because repotting is also known as “working on your business”.

Small business owners are notorious for doing everything else but work on their business. Even as a business consultant – it is difficult to practice what I preach in that regard as I often find myself drawn to working on my clients businesses before my own!

And that’s actually okay! It is very likely that your business has grown because you played up to your strengths of watering and fertilizing. If you are not a repotting expert (or you just simply lack the patience for it!) – hire someone who is! Every business needs its repotting champion. That individual or group or team who’s primary function is to work on the infrastructure of your business so that your business can continue to grow in it!

So in review, your business is the plant; your organizational infrastructure is the pot. The pot that sustained your initial growth will just not do for the next phase of growth. You need a new and improved pot. We’ll call it the “Make my business sustainable” pot. Not only are you concerned with getting your product/service to market – you want to get it there better. You are no longer concerned with just getting customers – you want to define the best customer for you and focus on those. And getting paid is no longer good enough either – now you want to make sure you keep more of what you make!

If that’s the stage you are at in your business – then congratulations! Its repottin’ time!

Mark A. Sandate is the Chief Repotting Officer of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, repotting workshop, please email mas@mas-solutions.biz.

Business Success Defined – by You!

How do you define success for your small business?

Is it when you become a global public company traded on Wall Street? Perhaps when you make it onto the Fortune 500 list – or maybe even the Fortune 100?

Maybe your goals are little closer to home – such as being recognized as an industry leader, or the largest employer in your community.

How about just keeping your doors open for more than 5 years? Will your business be a success then?

Well it just so happens that I am well qualified to provide a definitive answer for you on this question, are you ready? Ok, here it goes – it depends!

Wait! Before you toss the magazine down, let me explain! See it really depends on you, it depends on what you want out of your business, and it depends on what you want out of life. No one can define that for you, no business guru, and no business book – only you. So have you taken the time to do it?

Well no time like the present! The best way to arrive at the answer you seek is to simply ask the right question. In this case the right question is “Why did you start your own business?”

I’ve posed this question to many a small business owner around the country, and the top three answers are as follows (not necessarily in this order):

1. To attain financial freedom.
2. To have more discretionary time.
3. To do what I am passionate about and to do it, as Ol’ Blue Eyes said, “my way” – in other words, to promote my services and products in a way that also promotes my values.

Pretty much every other answer you might come up with falls under these three categories – and if you were to try to sum up the three in one word it would have to be – “Lifestyle”.

In essence, you could say that you define a successful business as one that supports your chosen lifestyle. So now let’s take a look at how you are doing. Show me your results and I will rank in order of importance to you the three answers above.

Is your business supporting you or are you supporting your business? House on the line and personal credit cards maxed out so you can keep funding your business? Then put “financial freedom” on the bottom of your list.

Are you enjoying that boat your business bought you, or are you working all the time with little to no time for you or your family? Are your days long, your weeks longer, and vacations non-existent? Well move “discretionary time” time on down the list too.

What about doing things your way? Does your business promote your values, or are your financiers, and maybe even your employees calling the shots?

Okay, wow, so remind me, why did I become a business owner again? Well, the reality is that while as a small business owner it may feel this way sometimes, you are likely enjoying one of these more than the others, and perhaps better said – at the expense of the others.

For example, securing your financial freedom might be so important to you that you are willing to postpone all that discretionary time until you’ve attained it. Or conversely, you rather enjoy your discretionary time now, and worry about retirement later. And for some business owners – well, it seems perfectly reasonable to commit all of their personal finances and time to the pursuit of their passion, especially if it means they don’t have to be held accountable by anyone!

It is extremely important you identify which camp you live in (again if you are not sure, just look at your results) so you can set up your business to deliver what you want. I am not advocating you sacrifice say financial freedom for discretionary time, because the truth is too much of that and you will end up with out a business and on permanent vacation, or horror of horrors – working the dreaded 9 to 5! I am saying; realize that even though money may not be the most important thing to you – it is vitally important if you want to continue doing business your way. So make sure you have someone on your team whose responsibility is the profitability of your business.

By the same token, isn’t the point of financial freedom to be free to do as you please? So start practicing now and unchain yourself from that desk! Empower your employees, delegate some of that control over, and go have dinner with your family. With accountability controls in place, I promise your business will still be standing when you get back!

In summary, you define a successful business as one that supports your chosen lifestyle, some aspects of said lifestyle will appeal to you more than others, be aware of which ones, and how it impacts the other areas. Now instead of sacrificing the other aspects of your lifestyle, organize your business to maximize your strengths and compensate for your weakness.

This way you can have your cake and eat it too – now that sounds like sweet success to me!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

The Bottom Line on Leadership & Management

Is there a difference between leadership and management, and if so – what is it?

Loaded question isn’t it? As a business advisor I am often asked my opinion on this matter, but as I endeavored to write this, I struggled with a bit of writer’s block. For the life of me I couldn’t figure out why. I have my opinion well thought out on this matter as I have enjoyed many a discussion on the topic. So why the struggle to put pen to paper? When I took a step back I realized my intended audience was speaking to me. The small business owner asking, “So what?”.

You have to love the small business owner – always direct and to the bottom line! And the thing is they’re right. Their time is much too valuable to read an academic discourse on leadership versus management. So the intention here then is not to debate the differences between leadership and management – but to address how the two affect the small business’s bottom line. In effect – answering the “So what?” question.

It has been my experience that most small business owners, whether they realize it or not, are actually very effective leaders. In that they took a concept, a dream, and turned it into a reality. Along the way the business owner convinced others such as creditors, customers, and employees that the dream was indeed viable and worthy of their investment. If that’s not leadership, well then I would have to say I am not sure what is!

Sure there are different styles of leadership; some better than others, but that mostly depends on the situation and people involved. At times consensus building is the best way to go, but at others (such as a turnaround situation) a directive approach is required. The small business owner that can distinguish the difference and adapt accordingly will go far. But only so far – as described in the following scenario.

I once had a middle-manager proudly tell me that his reports would follow him into battle. When I asked why this was, he credited his willingness to get his hands dirty and help them out with personal issues. While admirable, I noticed a glaring omission from his answer; he did not mention how he made their jobs easier and better. This was actually not a surprise since we were having the conversation due to inefficiency and productivity concerns in his department.

To continue with the manager’s battle analogy, I asked what he thought might happen once in battle, with bullets flying and the enemy breaking through the front line due to his lack of preparation – would his troops continue to follow him? Would the memory of him getting his hands dirty, and helping with personal issues motivate them onward? Sure that might inspire loyalty in some – but you can’t win a battle with only some of your troops!

As a small business owner you must always keep in mind that 80% of your employees work for you to obtain a paycheck in a manner that most conveniences them. For example an employee might take a job with low pay in return for a flexible schedule, a short commute, or advancement opportunity. Or conversely, they may accept long hours and poor conditions if the pay is high. The key here is – what’s good for the employee is what motivates the employee.

Expecting great results from an employee dealing with angry customers, long hours, disorganization, lack of communication, a failing company, etc. is a losing proposition. The employee can’t find anything good for them about the job and so therefore lack motivation.

Even the best of leaders would be extremely challenged to inspire positive results in negative conditions (as interpreted by the employee). And what small business has not gone through negative conditions? So what’s a leader to do?

The answer lies in exercising those other less sexy aspects of management such as planning, organizing, and controlling. By planning the work that needs to be done, organizing your resources to do the work, leading (read: influencing) your people through the work, and finally controlling the work to ensure the desired result – you will have accomplished the ultimate small business win-win scenario.

Your employees will have what they want – a secure paycheck while being productive and efficient. And productive and efficient employees mean better results for you. So the bottom line? If you want a better bottom line, remember that leading is only one element of the management process. Ignore planning, organizing, and controlling and get ready to watch the bullets fly!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

My Customer Ate My Cash!

Attention Small Business Owners! Announcing a new business model guaranteed to make you rich quick, this is a revolutionary secret so please don’t share it!

Loan your customers money, and then let them pay you back 70% of it in 4 months.

Sounds pretty shaky don’t it? Where’s the get rich quick part? Yes, you can laugh at such a ludicrous concept, but before you laugh too hard, let’s take a look at your Accounts Receivable – you know, the loans you give out and book as a sale. Now, I am not saying extending credit to your customers is a bad thing, in fact, it’s difficult to do business these days without offering terms, if you don’t, chances are your customers will go to someone who does.

The problems start when you extend credit without having a strong Credit & Collection Policy in place. If you don’t have one, or if you don’t consistently execute the one you have, then I would wager your Accounts Receivables are well aged and your Cash Flow tight at best. In simpler terms – you can’t pay your bills on time, or at all, because your customers have not paid you. How aggravating is that!? You’re being hassled by your creditors, maybe even taking out a loan to cover shortfalls, and there your money sits, in someone else’s bank account!

At the foundation of any good Credit & Collection Policy must be the idea that:
A credit sale is not really a sale until the account has been collected.

Prior to collection; the only thing tangible that a credit sale produces is a financial burden that strains cash resources. Payment for products and services delivered have not been received, but expenses for salaries, supplies, equipment and overhead have been incurred and probably already paid.

Look at it this way – assign a dollar value for the product/service you provide (Hint: your sale price which covers the cost of sale plus overhead and desired profit), say it’s $100, now instead of delivering the product or service – just fork over the cash to your customers and tell them to pay you when they can!

Wait, it gets worse! Did you know that for every 30 days your customer doesn’t pay you back you are incurring additional costs that were not factored when you came up with your sales price? Here they are:

> Time Cost. Calculates how much money you would have to invest today, at a given interest rate, to generate a principal-plus-interest amount equal to what will be collected in the future.

> Administrative Cost. Expense of increased collection efforts like phone calls, letters, lawyers, etc.

> Opportunity Cost. Rate of return you would have received if that money was available to invest in other sales/projects.

> Predictability Costs. Expenses resulting from imprecise cash forecasting.

> Financing Cost. Cost of a Line of Credit or loan to cover slow collection periods.

> Bad Debt Costs. Statistics show the older an account becomes, the greater the risk of not collecting. For example, of accounts 30 days past due, only 99 cents of every dollar is collected. Beyond 30 days the chances of collecting become progressively poorer. At six months this hits 50% and continues to drop with time.

So let’s look at the value of that $100 you “lent” your customer as it ages over time (certain assumptions have been made to calculate costs, results will vary per business).

Customer—Current—–30Days——60Days—–90Days—-120Days
XYZ———–$100———–$98.18——-$89.71——-$80.26—–$69.29

Remember, the $100 should cover the cost of sale, overhead and profit. Let’s assume your $100 is broken down as follows: cost of sale (COS) 70%, overhead 25%, and net profit 5% – it would look like this:

———————Current—–30 Days——-60 Days—–90 Days—–120 Days
Sales ————-$100——$98.18——–$89.71——-$80.26———$69.29
COS —————$70———-$70————-$70———–$70————-$70
GrossProfits——$30——-$28.18——-$19.71——-$10.26——($0.71)
Overhead ———–$25———$25————-$25———-$25———-$25
Net Profit ———-$5——-$3.18——–($5.29)——($14.74)——($25.71)

At 30 days you have eaten into your profit by almost $2; in 60 days all your profit is gone and you have $5 less to pay toward overhead expenses; at 90 days your short $15; and at 120 days not only can’t you pay your overhead, you’re coming up short covering the cost of sale (i.e. what you paid your vendor for the widget and/or the labor you paid your employees to perform the service).

Now multiply that times all your credit sales; still wondering where all the money went? I am absolutely positive you would never lend your customer $100 and tell them to pay you back $69 in four months! You wouldn’t would you? Unfortunately, if cash is tight, it is very likely that’s exactly what you are doing. Imagine, paying customers for the privilege of selling to them!

Ready for that Credit & Collection Policy now? Your policy should consist of the following three elements or activities:

1. The decision on granting credit and the terms to be offered.

a. Credit Application filled out and signed pre-sale (get a Personal Guarantee signed while you’re at it!)

b. Credit References thoroughly checked (if credit amount is substantial pull a credit history report – it is well worth the cost! Resources: Credit.net, D&B, Experian, etc.)

c. Designated authority decides on credit limits and terms based on established criteria.

d. Notify applicant in writing of acceptance, limits, and terms (include credit hold and late fee/interest penalties)

e. Notify sales team and file in customer folder, update accounting systems accordingly.

f. Review and update annually, sooner if “red flags” appear.

2. The monitoring of Accounts Receivable

An Accounts Receivable aging report must be generated weekly and all accounts reviewed, this way problem accounts can be identified early enough that effective collection proceedings can be initiated.

3. The formulation and execution of an effective collection policy

a. You must have a correctly aged listing of the Accounts Receivable.

b. Designated person with the authority and credibility to collect, and still maintain the highest possible client relations.

c. A record of collection efforts for each account, include follow-up action to be taken and when. An Excel spreadsheet works well for this.

d. Work in this “tickler” file every day. Follow-up should happen exactly as indicated and when.

e. Establish Collection Procedure similar to following:
1) Current: Make a “customer service” call pre-due date to ensure product/service was delivered satisfactorily and invoice was received without discrepancies.
2) 30 days: Call customer with friendly reminder. This will be followed by a brief letter confirming the agreements reached.
3) 45 days: Call customer to determine why money still hasn’t arrived and secure a new commitment. Send second letter.
4) 60 days: Call customer and send letter notifying of suspended account and intent to enforce collection.

In summary, the foundation of a collection policy should be clear, effective, and consistent communication between you and your customers. This communication begins with the customer’s application for credit, and continues through all subsequent contact. The emphasis of this communication is the customer’s responsibility as a recipient of credit, and your responsibilities as creditor. Avoid writing off bad debt by having a clearly articulated credit policy, and by letting all customers know what the policy is, and that you are committed to executing it till they comply. Happy collecting!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

#1 Killer of Small Businesses

If you don’t know what it is – your business may already be in trouble!

If you answer the following question incorrectly – you are one of the six out of ten small businesses that will fail. Are you ready? Here it is:

What is the number one killer of small businesses?
a. Lack of sales
b. Lack of profits
c. Lack of cash
d. Lack of employees

If you’re not sure, let’s use the process of elimination; you can do without three of the four for any period of time as long as you have plenty of the fourth. It should be clear now – “C”, final answer! Cash is king. The fuel that makes your business vehicle move forward, without it you have a hunk of rusting metal in your driveway. Without it, you will be a statistic – a business failure.

If you will recall in our previous blog (see below) we discussed building your ROAD (result oriented action & direction) map to success – planning your route to your business destination. In staying with our analogy, you have carefully planned your family trip to Fun World, including how many miles it will take to arrive, but you have forgotten one small but very important detail – you failed to calculate the amount of fuel you need to cover the distance. Can you imagine that, your family packed in the car, eagerly anticipating a fun filled day – then the car stalls and you’re stuck on the turnpike in sweltering heat? Suddenly, worrying about what time to leave or which route to take seem very trivial compared to having the required fuel to reach your destination don’t they? You wouldn’t make that mistake would you? Unfortunately, small business owners make it every day.

They fail to predict the cash needed to reach their intended business destination. Oftentimes, when I ask a small business owner how they know their company is doing well, the answer tends to be, “My sales are up!”. And while some do know if they actually made a profit on these increased sales, sadly very few know their actual cash position (the fuel gauge) at any given point in time.

Ok, so you got the answer right (go back and circle the right one if you didn’t – no one’s looking!), so that means you are now one of the four out of ten that actually make it right? Well not so fast. Knowing you have to manage your cash flow and actually knowing how to manage your cash flow are entirely two different things. Time for another pop quiz!

Do you, or anyone in your organization, know how to manage cash flow?

If you answered “Yes”, congratulations, you are excused from having to read on! If you answered “No”, you have just increased your chances of experiencing business failure. You might be thinking, “Wait a minute, I have never done cash flow management but I have been in business for over five years now!”. Is this possible? Absolutely, you have a great product/service, you are an excellent sales person, you have great relationships with your vendors, your overhead has not caught up with your sales, you started out with or have access to sufficient capital; the preceding likely translate to flush cash reserves. That’s the good news – the bad news is you will likely be a victim of your own success. You will not feel it is necessary to control your cash flow, and then your business will eventually fail. It might surprise you to know that many businesses experience tremendous success and growth right before going out of business, and the reason often cited is lack of cash to support the growth! So what is cash flow and cash flow management anyway?

In essence, cash flow is the amount of money that comes into a business versus the amount that goes out. Cash flow management addresses the gap between when you have to pay your suppliers and employees, and when you collect from your customers. Les Masonson, author of Cash, Cash, Cash: The Three Principles of Business Survival and Success, has described cash flow management most succinctly, “getting the money from customers sooner, paying bills at the last possible moment, concentrating money to a single bank account, managing accounts payable, accounts receivable and inventory more effectively, and squeezing every penny out of your daily business.”

You might already practice some of these techniques, for example stretching your supplier payments as long as you can. But before you pat yourself on the back – there is a difference between being late on your payments and managing your cash flow – and that difference is organization. Without having an organized approach to your cash flow – being late on your payments just makes you late – it also makes you a credit-risk and in danger of losing your suppliers.

To get organized, first you must know your current cash position. If you are not sure how to arrive at this, it’s the same as reconciling your personal check book: last balance minus any withdrawals (i.e. checks that have not cleared) plus deposits. Next, list all your recurring expenses such as rent, utilities, payroll, loan payments, etc., include the amount owed, and when – a spreadsheet works well to accomplish this. Once you have your list you have to prioritize it, for example payroll and payroll taxes get paid before utilities. Now you have to make two more lists, one lists the estimated collections (actual deposits not sales!) you expect for the week, and the other lists payments for the week. You should end up with the following calculation:
Starting Balance
+ Estimated Deposits__
= Estimated Available Cash
-Estimated Withdrawals
= Estimated Ending Cash Balance

This will provide you with an estimate of your cash position for the week and allow you to make decisions as to who gets paid what and when. It also tells you what your collections goal for the week should be in order to cover the estimated payouts. If a vendor calls looking for payment, you can actually make a commitment, schedule it, and live up to it!

Don’t forget at the end of the week to compare what actually happened to what you estimated. Reconcile your ending balance and now you are ready to start the next week all over again! Sounds like a lot of work? Actually its not if you organize, and remember, not doing it is the primary reason most companies go out of business. Short term cash flow management like the example given above is critical for businesses in trouble, but even if your business is doing well, you stand to benefit from doing this forecast on a monthly, quarterly, and yearly basis.

Ever driven a car with a broken gas gauge? Pretty scary isn’t it, never knowing when you will run out of gas? It’s not a problem as long as you can keep the tank full at all times, but how realistic is that? Is your business account always full of cash? If not – its time to fix the gas gauge – start cash flow management now!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

What’s YOUR Business Destination? Are You There Yet?

10 Steps to Building Your ROAD Map to Success

“Daddy, are we there yet?” Sound familiar? That would be your child in the back seat wondering just where is this place called Disney World! Unlike you, they have not read the map, written down the directions, and calculated the time it would take to travel the 250 miles – allowing for traffic of course. That is to say, they have no point of reference, no idea where they are compared to where they want to be.

Unfortunately, as small business owners we often find ourselves with the very same ambiguity in regards to the direction of our business – or even worse – what our final destination was in the first place! Is this you? Let’s find out!

Why are you a small business owner?
What should your business be doing for you?
What’s your business destination?
How do you get there?
Are you there yet?
If not – where are you now?
Are you advancing in the right Direction?
Why or why not?
If not – how do you get back on course?

How did you do? Did the answers come easily or are you surprised at being stumped by a few, or even all of them? If the latter, you are likely attempting to navigate the business world using only your gut and instinct as a compass. Please don’t misunderstand, I am not bad mouthing guts and instincts – they will get you far, but I am sure I am not the only one who has headed South when I felt like I was heading North!

Okay, so you get the point – you need to know where you are going, the best way to get there, reference points along the way, and how long it should take – basically a ROAD (Result Oriented Action & Direction) Map to your Business Destination. Here are 10 steps to get you started on your journey to success:

1. Write down your Vision & Values (at least three of each). You will find this is your Lifestyle – and it answers the questions, “Why are you a small business owner?”, and “What should your business be doing for you?”. It defines what “success” is for you – living your vision while promoting your values!

Exp: Vision: More time for family
Values: Integrity

2. Evaluate where you are now in comparison to your Lifestyle as described above – are you there yet? Are your current Actions moving you in the Direction of your desired Results? If not, you simply have a job working for your business. The objective here then is to turn the tables and get your business working for you (i.e. fulfilling your lifestyle)!

3. List the Problems/Challenges preventing you from reaching your destination. These are your roadblocks, wrong directions, traffic congestion, etc

Exp: Money going from my personal account to business account
Haven’t had dinner with my family in months
Employees tell me what to do!

4. List the inverse, or Opportunity, of each Problem/Challenge. These are now the Mile Markers along the route to your destination.

Exp: Money goes from business profits to personal account
More time with my family
I delegate to my employees – and they do it!

5. Rank order the Mile Markers along the path to your destination. It’s impossible to arrive at every marker at the same time so you need to determine which is the most crucial – which one most secures your lifestyle? This will be Mile Marker One! Then list the rest accordingly (don’t worry – this isn’t written in stone – it can, and likely will change).

6. Draw your route to Mile Marker One. The Problem/Challenge is your starting point and the Opportunity is your destination. How do you go from here to there?

Exp:
Starting Point = Personal Money Transferring to Business Account  Destination = Business Profits Transferring to Personal Account

a. You first have to understand why you are that starting point versus the destination.

Exp: Personal Money transferring to Business Account due to Lack of Profit Planning, Undercapitalized, Decreased Sales, etc.

b. Invert your answers to understand what you must do to arrive at the mile marker.

Exp: Plan for Profit, Obtain Financing, Increase Sales, etc.

c. Rank these tasks in the order when they should be done.

Exp: Plan for Profit 12/15/05
Obtain Financing 01/05/06

d. Describe how each task should be done.

Exp: Develop a Monthly Budget, fix my expenses, calculate my Break Even Point, etc.

e. Match each task with the individual who will/can accomplish it.

Exp: Business Owner, Controller, CPA, Banker, etc.

7. Monitor progress and/or completion of each task required to reach the Mile Marker.

8. Stay flexible but don’t lose sight of your destination. Reroute, delay, speed-up, etc. as necessary when new or unforeseen roadblocks are placed in your path. Just make sure to always get back on course towards your destination.

9. Do it all over again for each Mile Marker!

10. Review, Reassess, and Reaffirm the Vision and Values you are committed to (Step 1), on a monthly basis (and I do mean plan it in your calendar). This will help you to continuously – Regain your Vision, Renew your Passion, and Reinvigorate your Will & Commitment.

Guts, instinct, fire in your belly, etc. are all great and desired traits for an entrepreneur, but are you willing to bet your lifestyle on them? How much more powerful would those traits be if you added “clarity of direction” and “focused action” to your repertoire? Increase the odds of reaching your Business Destination by building your ROAD Map today!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

Hello world!

Small Business is the backbone of America – if I can be but just a single vertebrae to support said backbone – my life and passion will be fulfilled. I hope this blog helps small business owners and small business owner wannabees alike! Enjoy and come back often!