5 Small Business Mistakes to Avoid
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The past couple of years have been a real trial for most business owners as they’ve struggled to maintain sales and profitability during one of the worst economic downturns in our nation’s history. It’s no surprise then that many of them have been happy to say goodbye to 2009 and hello to a new decade.
As you set your sights on the years ahead, you should first make sure that you aren’t bringing old baggage with you, like these five common mistakes made by small business owners in the economic downturn. If any of these “don’ts” look familiar to you, resolve to correct them now so you can start this year with a better chance of success.
- Don’t hold a sale on your high-volume, low-margin products. True, you can sell a lot of product this way. But while it may be a great method to boost sales, it will also lower your gross profit, as well as the value perception of your product.
In fact, this strategy is the exact opposite of what you should be doing, which is focusing your sales efforts on your high-margin products and offering customers extras that don’t cost you a lot to provide, like free shipping or express order processing. The key is to devise a discounting strategy that doesn’t undermine your pricing structure and condition your customers to expect even lower prices in the future.
- Don’t be afraid to use your bank credit line to meet your cash flow needs. Sometimes owners are afraid to tap their lines of credit for fear that their banks will make demands they can’t accommodate. But financing cash flow is what your credit lines is there for — and this may be the perfect time to use it.
By borrowing wisely, you can help make sure your management team spends its time doing things that make your business better instead of struggling with cash flow issues. Just be certain that your borrowing needs are temporary and your business will be able to pay the money back when things pick up again. (Note: Using a credit line to finance losses is a bad idea, unless it buys you extra time to turn those losses around and you have an active program in place to do just that.)
Don’t have a credit line? Despite what you might hear on the news or read in the paper, there are banks out there willing to lend money today. Many community banks in particular are open to companies with good management, solid business plans, and strong financials.
- Don’t give customers with overdue balances a free pass. Small business owners can be hesitant to pursue collections of past-due accounts receivable for fear that they’ll alienate customers or make them angry. But avoiding active collection efforts so you don’t make customers mad just creates problems for your company.
It comes down to judgment. There are good customers who may be experiencing temporary cash flow challenges. And then there are slow-paying customers you tolerate in good times but can’t afford in bad times. Use this opportunity to collect as much as you can from the deadbeats and then drop them.
- Don’t overlook regular reports on cash flow. Why don’t business owners get regular reports on cash flow? The common reasons run along the lines of, “It’s too much work to get them from accounting,” or, “They’re too hard to read anyway.” But neglecting to regularly receive and scrutinize accounts-receivable and accounts-payable aging reports, bank account reconciliations, and short-term cash forecasts is asking for trouble.
These reports tell you where your cash is, where it’s going, and where you need to make changes, like speeding up collections and/or slowing down payments.
I was recently interviewed on my friend Jim Blasingame’s small business radio program, “The Small Business Advocate Show,” and this is what he had to say about neglecting cash flow reports: “It’s like driving the wrong way down a one-way street at night in the fog.”
- Don’t give your customers cut-rate prices when they ask for them (and they will!). Your customers want to reduce their costs of course, but often without doing anything different themselves. They’d rather you just cut your prices. If you agree, you’ll be funding their inability to manage their businesses properly to the detriment of your company. Instead give your customers tools and techniques that allow them to better pass on their costs to their customers by selling value rather than price.
Another great article from AllBusiness.com
Gene Siciliano is an author, a speaker, and financial consultant who works with chief executive officers and managers to achieve greater financial success in a changing economy. His new book, Financial Mastery for the Career Teacher, is scheduled for publication in spring 2010.