All businesses must grapple with developing the right mix of customers/clients to optimize their resources. From a positioning/branding standpoint, it's also important to have a clear focus in terms of what it is that you provide, who you provide it to, and why you provide it (your mission). 

Having that focus can then serve to help you make decisions about which customers to serve and which not to serve. Importantly, it is never a good idea to take on a project/client/customer who you cannot serve well. That will only tarnish your reputation.

Here are some situations where you might decide that saying "no" is the right thing to do:

• Your potential client or customer is asking for something that is not part of your current skill set, and it would take too long--and cost too much--to build that skill set. For instance, in our case, if a client is looking for website development, we might have to turn them away. We don't do that. We might we someday, but we don't right now and couldn't serve the customer well--so we would refer them to someone who can.
• From your discussions, you get the impression that this might be a "problem" customer or client. They may not be able to convey a good indication of what they are really looking for which can often be an exercise in futility. It's hard to satisfy customers who don't really know what they want.
• Their tone/personality may be abrasive or somehow not aligned with your values. It happens, and that's okay. In these cases, what we may do is refer the prospect to someone else we feel could serve them better.  
• You have too much on your plate. When you have too much going on you may not be able to serve a new client or customer effectively. Doing so could result in work that's not up to your (or your customers') standards and could, ultimately, damage your brand and reputation. We've had to say "no" when there's been too much on our plate. In these cases, we've referred those prospects to another consultant or organization so they could get the help they needed. 

It really doesn't serve your customers, or you, to take them on if the fit isn't there or you don't have the specific skill set to serve their needs. 

Learning to say "no" doesn't come easily, but we've learned that it is often the best thing to do.