This month we will explore the 5th principle from "Advice from the Lemonade Stand" entitled "Don't Let Anybody Take your Stuff." To catch up on previous articles from this book, visit our website www.gcsbdc.com and go to the "resources"menu and you will see previous issues of the newsletter as well as all the articles that we have published.
The principle of "Don't Let Anybody Take Your Stuff" focuses the business owner's responsibility to guard her own assets as well as the assets of the business. As has been said many times before, "It's not how much you make, it's how much you keep." We buy assets to support sales. Sales (less expenses) create profits which we use to pay taxes, pay the owner or investors, and to reinvest in the business by buying more assets to begin the cycle all over again. It is the owner's duty to make the most efficient use of those assets. Failure to do so will result ow up with the symptom of "too little cash." So, let's take a look at some of the causes for too little cash.
Poor purchasing: Paying too much for your assets. Owners must be careful to maintain constant vigilance to be sure they are getting the best price, the most bang for their bucks. Don't be afraid to ask for a better price. You surely will not get it if you don't ask. Shop, shop, shop! Keep some distance between yourself and the sales representatives that call on your business. The impact of a dollar saved in purchasing is greater than the impact of a dollar gained in sales.
Poor pricing: Charging too much or too little for your goods or services. Almost all businesses err on the side of charging too little. Everyone is afraid that they will lose sales if they raise prices. This fear keeps them from raising prices, especially when the economy is down. The better practice is to raise your prices in small increments on a regular basis. You will have much less "push back" from your customers if you implement small increases regularly than if you are forced to raise your prices by a lot all at once. Your SBDC consultant can help you calculate the impact of raising your prices. Raising your prices by 1.5% every 6 months will barely keep you even with inflation. You have probably noticed that your suppliers are not shy about raising their prices to you. If you fail to raise your prices, you will without doubt, see your profits erode over time.
Excessive inventory: Too much cash tied up in inventory. You may be buying too much, or you may be buying the wrong thing. Besides tying up cash, too much inventory will result in hidden costs, like storage, breakage, write off, and theft. Your SBDC consultant can show you how to calculate your inventory turns and to translate those turns into money. You might be very surprised at the difference a day makes. Speeding up your inventory turnover by any measure will improve your cash by an appreciable amount.
Too much customer credit: Managing your accounts receivables. How much credit should you give any customer, for how long, and at what interest rate really depends on how you feel about being a banker. Every dollar of your cash that is tied up in receivables is money that you can't use to buy assets to support sales, or to pay your own bills, or to return to investors. There are many ways to reduce your accounts receivable cycle, shortening the amount of time between the time you make the sale and the time the money is in your bank. Some are simple, like sending your invoices by e-mail, or billing twice a month instead of once a month. Work with your SBDC consultant to develop a strategy for reducing your receivables and increasing your cash.
Shrinkage, theft, or embezzlement: An unfortunate truth is that not everyone is honest. The thieves among us are not clearly identified. It is up to you, the business owner, to implement strong internal controls and enforcement of the rules designed to protect you and your assets. Certainly you must control access to your checkbook and cash register; but also control access to credit card transaction reversal codes, gift cards, discount coupons, postage and other near cash items. Most often, it will be someone whom you trust who has gotten close enough to you to make you feel comfortable about relaxing the rules who will take advantage of you. In addition to the "intentional" theft, and much more common, is "thoughtless" theft. Examples would include employees who use your toll free lines for personal calls, petty pilferage of office supplies, expense account padding, or misuse of employee discounts. The employee does not think of this as stealing, but all of it comes out of the owner's pocket. None of these amount to much individually, but taken as a whole can be significant. A responsible business owner will set the example by treating the company's assets as separate from his own assets, and being ever vigilant.
Next time, we'll take a look at the 6th principle: "Do the right thing"
