Archive for the 'Cashflow - Credit - Collections' Category

Selling services? Think price not wages

Millions of small businesses sell personal services like consulting, website development, or janitorial services, instead of something tangible like a computer or a kumquat.

Unfortunately, pricing a service is not as intuitive as a tangible product. Consequently, service businesses too often don’t charge enough to sustain themselves profitably.

Recently I received a question from one of these owners about how to price the services of their new cleaning business. Perhaps my answer to them will help you.

Don’t make the professionally fatal mistake of comparing what you charge customers to deliver a service to how much you would expect to make as an employee. Doing so, to paraphrase Mark Twain, is like comparing lightning to a lightning bug. You have to think pricing, not wages. Here’s why:

1.  You’re a business now, which means you have price lists, not wage lists. And you collect revenue, which has to produce the gross profit to cover all expenses, including the salaries of the owners.

2.  If you have no employees you’ll work more hours in a month than you can bill for, like time spent on marketing, selling and administrative tasks. Consequently, your business must collect enough revenue to cover the time and expenses of performing or outsourcing those tasks.

3.  Until you have employees, you’re a 100% extension of yourself, which means your only revenue leverage is the hours you can bill multiplied by your hourly rate.

CC photo via Pixabay

CC photo via Pixabay

Use this pricing logic to get you started: Determine all monthly expenses, including paying yourself as an employee. If you’re home-based include a reasonable office overhead factor and don’t forget payroll taxes. Then, divide that total by the number of billable hours you have the capacity to perform in a month (not the hours you actually perform). That quotient is your breakeven rate.

But in order to sustain your business long-term, you have to make a profit, so the rate you charge customers is somewhere between breakeven and the impact of three more factors:

1. What the market will bear (competitive pressure)

2. How much you need the sale (badly at first)

3. The commitment a customer is making to you (customers who sign annual contracts get discounts)

This method should cover most variables you’ll face when proposing to a prospect. Plus it will help you see the negative impact when you deliver less than capacity, or the dynamic effect of adding employees.

Write this on a rock … When selling services think pricing, not wages.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

RESULTS: How is your business tracking in the 4th quarter?

The Question:

With one month to go, how is your business tracking in the 4th quarter?

15% - Way ahead of last year’s sales or budget
46% - A little bit better that last year
18% - About the same as last year
21% - Worse that last year
Jim’s Comments:
When we asked a similar question in early September, 65% of you said things were trending well for the end of the year. As you can see, our new poll question on the economy prompted just short of that response, at 61%.  And just as we’ve seen for almost six years, about one-fifth of small businesses are still struggling.
There are two things that might be making the economy trend upward:

1. Republicans will be in control of both houses of Congress for the next two years. Most people who make payroll consider a GOP-led Congress to be an improvement if for no other reason than they’re not anti-business.

2. Gas prices are down almost a dollar from a year ago. That’s like a huge tax cut for the folks on both sides of the cash register.

Here’s hoping the winter isn’t too bad and we can carry some momentum into next year.

Is a crowdfunding business loan right for you?

In my last column I introduced the concept of crowdfunding — the new word and online methods of fundraising and capitalization. The two crowdfunding examples I described were contributions and business transactions doubling as fundraising.

Let’s continue with the third type, which is, crowdfunding structured for loans.

Crowdfunding debt, AKA peer-to-peer and social lending, is like traditional borrowing: a request for funds comes with the promise of repayment with interest over a specific term. But the former is done online, and the latter is not. Individuals use crowdfunding for personal loans, but our focus here is for business borrowing, which typically involve four crowds:

1. Business borrowers

2. An online crowdfunding platform aggregating loan requests

3. A funding and underwriting source, likely a hedge fund

4. Individuals who invest with #3, knowing it’s for loans to small businesses

Remember the innumerable and anonymous crowdfunding factors from the previous column? These two are also in play with crowdfunding debt, because a large crowd is required to provide a pool of loan funds and dilute the risk, and investors are only known to the funding source aggregator.

Regardless of the funding source, crowdfunding or traditional, small business loans are expensive for the borrower because this sector is considered high risk for two primary reasons:

1. Most small businesses are undercapitalized and operate on a thin survival margin

2. Too many small business owners don’t track financial performance well enough to know how they’re really doing.

And since crowdfunding loans are unsecured, taking the risk to an even higher level, crowdfunding business loans are doubly expensive.

So is a crowdfunding business loan right for you? Here’s some context: If you can borrow from your bank, this year you’ll probably pay an average of about 6% annual interest rate. A crowdfunding loan APR will likely be 15% or more. Any questions?

Crowdfunding business lending has achieved some level of critical mass and is growing.  As I’ve said before, the future of small business capitalization will look a lot different than it does today largely due to this emerging alternative.

Next time we’ll wrap up this series with a tour of the good, bad, and improbable of investor equity crowdfunding. And more tough love.

Write this on a rock If you can borrow money from a bank, don’t borrow from a crowd

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

Three fundamentals of small business capitalization

The first sentence in the job description of every CEO should be, “Get the capital your company needs.”

Webster defines business capital as, “any asset, tangible or intangible, that is held for long-term investment.” Capital blended with operating cash flows becomes the financial fuel your company’s engine uses to operate with and fund growth.

•  Investment Capital — from you or someone else.

•  Borrowed Funds — for most small businesses, from a bank loan.

Additional capital is required just to STAY in business beyond what was necessary to START the business. And the stay-in-business capital is much more than the get-in-business capital. Success begets growth and growth eats capital like Cookie Monster eats chocolate chip cookies. So without a capitalization plan you can grow yourself out of business.

Here are three capital allocation guidelines.

1. Don’t use operating cash to purchase assets.

2. Don’t borrow money for operating expenses.

3. Funding growth with borrowed money is okay, if you have a plan to convert growth funding from debt to retained earnings.

Retained Earnings

As the CEO or your business, it’s your job to acquire, manage, allocate and maximize all sources of capital.

Jim Blasingame is the author of the new book,”The Age of the Customer: Prepare for the Moment of Relevance.

SBA Poll Results: Should minimum wage be increased?

The Question:
People around the U.S. are protesting for the government to increase federal minimum wage. What do you think?

18% - Agree: minimum wage should be increased.

82% - Disagree: the market should set labor prices, not government.

My Comments:
Before any commercial product or service can be offered to customers, the price must be determined. The foundational element of the price calculus is the cost, which includes payroll. In a true free-market economy, all elements of cost are determined by the marketplace.

But in the U.S., we don’t have a true free-market economy because the government sticks its nose into the equation with mandates and subsidies, one of which is the federal minimum wage. When the government is involved, politics, not reason, is the motivation, which is fine when the issue is politics. But when the issue is the price businesses pay for one of its cost factors, especially what is often the largest cost factor, politics has no place. At least, as you can see from the results of our recent poll, that’s what 82% of small business owners believe.

I’ll have more to say about this son in our Feature Article. Stay tuned and thanks for participating.

Check out more of Jim’s great content HERE!

Take this week’s poll HERE!

Watch Jim’s videos HERE!

SBA Poll: What’s important in 2013?

The Question:
What’s the single most important thing you’re working on in 2013?

57% - Sales - we need more revenue

30% - Profit - sales can always be better, but we need to improve profitability

2% - A bank loan - so we can take advantage of growth opportunities

11% - People - we need employees who are qualified to do our work

My Comments:
What these responses confirm is that the economy on Main Street is still languishing.

  • Sales and profits are both cured by a robust economy.
  • When small businesses grow, they usually fund that growth with a loan from a bank.
  • I’ve been told by economists that there may be one million jobs going unfilled in America because employers cannot find qualified candidates.

The last time the U.S. marketplace experienced such a moribund economy for this long was when Jimmy Carter was president, during the period he described as having a kind of “malaise.”

President Obama, Carter’s presidency is not a comparable you want to be associated with your legacy. Please allow me to introduce you to small business owners who can give you some tips on how to get this economy growing.

Check out more of Jim’s great content HERE!

Take this week’s poll HERE!

Watch Jim’s videos HERE!

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