Without doubt, the number one issue I have encountered with business owners over the years is a poor relationship with money. Either they don’t take any responsibility for the money in the business, or they are unrealistic about costs and revenue, or they simply don’t know how to charge appropriately.
Here are 9 strategies that if adopted in any business, will have a profound impact on income, profitability and cash flow:
1. Be 100% clear about exactly how much it costs you to operate your business each month.
Very few business owners know this figure. I think it is the single most important number that we need to know. If you don’t, you are flying blind, never really sure if you are making money or not until, you do your tax return at the end of the year. By then it can be too late. Ideally, you need to know how much it costs you to run your business every hour, every day, every week and then every month.
2. Always be absolutely conservative when it comes to estimating costs.
Most people under estimate their expenses. They forget about certain items, they don’t think things cost as much as they do and they are often unrealistic with spending. It is always best to err on the side of caution and over estimate what things cost as opposed to underestimate.
3. Review your costs all the time.
Costs creep up over time and what it costs you to run your business a year ago will probably be quite different to what it costs today. We need to monitor all costs in our business closely and often. I review my operating costs every month, looking for changes, anomalies and anything else that catches my eye.
4. Set a clear sales target each month (and remember breaking even is not the goal, making a profit is).
Like most things in life, if you set a goal or a target, your chances of achieving it are dramatically improved. Set a monthly target, one that ensures you make a profit, and then do whatever you can to reach that target. And when you do, celebrate long and loud.
5. When it comes to saving money or cutting costs, work out how much you could save in a year not just a month.
To save $200 a month doesn’t really sound like a great saving, but when you convert it to $2,400 a year, it suddenly becomes significant. Most businesses could save a lot of money simply by spending time actively looking for ways to cut costs, especially when looking at these costs as an annual expense.
6. Adopt a much harder approach to setting budgets.
For many years when I was planning a project I was always overly optimistic with everything and the projects rarely produced the numbers I thought they would. Like many people, I would underestimate how much a project would cost, how long it would take and how much revenue it would generate.
So I developed a seriously tough budgeting model for new projects. I had to double how long I thought the project would take, double how much it would cost and half how much revenue I would generate in the first twelve months and if it still stacked up, go for it, if not, forget it. Now this is a tough model, but I’ve never lost money since adopting it.
7. Don’t be afraid to put your prices up.
All too often I encounter businesses that simply don’t charge enough for what they do. If you were operating at full capacity, meaning you couldn’t do any more work, what is the maximum amount of money you could make (less costs). Is this enough? Be realistic about the number of days you could actually work, take out holidays, sick days, weekends etc. If your maximum income potential is not what you thought it was, either your prices have to go up, or you have to reduce your costs (or both).
Charging more is generally the first strategy I recommend and yet most businesses are hesitant to do this out of fear of losing customers. If you have a great business, with excellent service, top quality products or advice, people will accept you increasing your rates if you explain the benefit to them.
8. If you invoice for your services, invoice quickly.
Way too many businesses are hopeless at sending out invoices. By the time they get around to doing their invoicing they have forgotten half of the things they need to charge for and there will almost certainly be items that simply slip through the cracks. Of course once you invoice you still have to get paid, adding even more time to the money ending up in your bank account. Invoice immediately.
9. Cut people off who don’t pay their bills.
We have to set boundaries with our customers in terms of payment. If payment is overdue, stop supplying them. Now we need to let them know that this is the way the relationship will work from the beginning, don’t just cut off their service out of the blue. If they know the rules and they don’t pay or ask for an extension of payment terms, don’t let the amount get larger.
Slow paying is the first sign of trouble with an account and I have certainly extended credit when I shouldn’t have, and that has ended up costing me a lot of money. I have learned that people respect businesses that are clear and tough on their payment terms. Don’t keep extending credit out of fear of losing the client. If they don’t pay on time who wants them?
Imagine how your business would look if you adopted these 9 strategies? To me, one of the key factors in a business being successful or not is the business owner developing a healthy relationship with money.