by: Jeff Heybruck
Sometimes the best advice isn’t the most obvious. Our CFOs have learned a thing or two about how to run a small business over the years – and some might be surprising.
Here’s our top 5 list of sound, but counterintuitive, small business owner advice.
1. Bigger Jobs Aren’t Always Better
It can be tempting to say “yes” to every big budget job or contract. But larger, more complex jobs sometimes mean lower margins, more risk and more headache. Larger jobs also often come with stricter deadlines and less flexible requirements due to increased executive visibility, which can put increased stress on employees. A client in the paving industry has been moving upstream (bigger jobs) and realized at some point, they have to change their pricing model. They can’t be successful quoting a million-dollar parking lot using the same markups and margin targets as a $10,000 patch job. The volume is nice, but it has to be thought through and fit the business model.
Our advice to small businesses? Consider selling a larger volume of smaller, higher margin jobs until the business has a stable financial footing, understands its niche, and is ready to make that leap. Singles and doubles are a great strategy to reduce risk and increase profitability. For new customers, smaller jobs can also be a great way to get to know a new organization or client before making a larger commitment.
In short, let the bottom line drive decisions about which clients or jobs to take on, not the top line. Doing so will require the financial team to first put in place measures to track important metrics (eg. COGS) to understand margin at both the job and customer levels. Enlisting the help of a professional accountant or CFO services may be required to calculate these metrics correctly. The return on the investment in time and resources to get this data will go a long way towards getting the information needed to build a profitable small business.
Let the bottom line drive decisions, not the top line.
2. Don’t Be Afraid To Turn Down Bad Business
It can be easy to fall into the trap of saying “yes” to every business opportunity (especially for younger businesses that have yet to reach target revenue milestones). But over time, this can build the business to be something that leadership never originally intended. First, define the target offering or niche, then think about “ideal client” indicators.
Then, stratify opportunities and existing clients – or separate them into groups from most ideal to least ideal. By stratifying clients, efforts can be focused on the ones that are most important. This information can also be used to set different pricing and terms for different clients.
Some criteria we’ve seen businesses use to score clients are:
- Margins: How much profit is made on each job?
- Location: Are they located in our target market?
- Days to pay: How long does it take the client to pay?
- Amount of business: What is the earnings potential both over the short term and lifetime of this client?
- Ease: Will working with this client be enjoyable? How do they treat others and what is their communication style?
Once ranked, those that fall at the bottom of the list aren’t always candidates for ending the relationship. The reasons behind “why” they are in last place will matter. Is it because margins are low, but the business services can get margins back up, making the client fall back into “ideal” territory? Or is the factor something that cannot be easily changed (eg. a poor “Ease” score)?
Having no deal at all is better than having a bad deal.
This is such a critical piece of advice, that we plan to put together a more in depth “how to” article on client stratification in the coming weeks, including a Scorecard Template for download. Stay tuned.
3. Culture Fit Is A Big Deal
A third piece of advice is one that really rings true for small businesses. If the client is not a good culture fit, it can be disruptive to the business. In these cases, just one poor culture fit can weigh heavily on a resource-strapped team.
Demanding and disrespectful personalities in a customer create a negative work environment, which can lead to lower productivity, more stress and in extreme cases, employee turnover. The downside of a bad culture fits extends to leadership, distracting from other priorities and making it harder to run the business effectively.
We had one client who was frustrated with the quality of work we were doing. Admittedly it was below our standards, and we acknowledged that. But this client took the opportunity to brow-beat the Accounting Specialist who was doing the work. I quickly got on the phone and made it clear that if he had those issues, he needed to bring them up to me and that I would not accept him speaking derogatorily to one of my co-workers. He had two options, give us a shot to fix it and get a month free, or we part ways immediately and refund his last month invoice. Pick one, now. He chose option 1 and we got the ship righted; today he’s a big fan and fits our “client culture”.
Make sure it’s a culture fit, turn the business away if it’s not. Remember that turning away a customer that is not a good fit for company culture is not a loss, but a win. As the real estate industry puts it, “You’ll never go broke on a deal you don’t do.” In the end, the disruption and distraction caused by a bad fit can make it harder to attract new business that is a good fit.
Here are some tips for turning away a customer that’s not a culture fit:
- Be polite and professional.
- Explain that the company culture is not a good fit for their needs.
- Offer to refer them to another company that may be a better fit.
- Be firm and consistent.
4. The Customer Isn’t (Always) Right
Good customer service should never go out of style. But a client that doesn’t see you and your team as the expert may not be a good fit. Do they listen? Do they respect expertise and advice? Do they act on good advice given to the small business or are they more interested in maintaining the status quo?
The ability to be effective at a trade or service is highly correlated with clients willing to listen (and act on) advice. Some businesses might feel that they should take on a client they know will be a challenge just because they need the revenue. But it’s important to consider the risk the business takes on questionable clients or by continuing the relationship. Lucrum has made this mistake several times: a professional advisor told us that a client churned through professional service firms and business partners but was never at fault; it was always the other party. Well, we took on the client anyway. Sure enough, that advisor was right, and we were soon blamed for things beyond our control (like their tax bill being too high). Another client refused to meet with us – making excuses, skipping appointments, or ending the conversations early when an “emergency” would come up. When their business started struggling (because they didn’t heed the warning signs we couldn’t give them) they fired us saying we didn’t give them any value because we didn’t predict the cash shortfall. In both cases we should have either refused or ended the engagement before it crashed and burned.
In cases where the customer is not respecting expert advice, the risk is an ineffective result. And, ultimately providing little value since the client is not making positive change in response to guidance. This can reflect poorly on your reputation for results, endangering future business and referrals.
If a customer is constantly arguing, questioning judgment, or trying to dictate how to do the job, it’s time to turn them away. By doing so, it protects morale, reputation, and the business’s bottom line.
5. Beware Of Signing A Deal Or Client Too Fast
Have you ever received a phone call and the client wanted to move fast?
It could be a good opportunity, but make sure to do the due diligence to understand how they ended up with the “urgent” need. In some cases, the reasons might be a green light to move forward, for example, that the client has experienced rapid growth or success. This is of course, as long as the speed needed doesn’t create too much pressure on existing resources or that the business is capable of scaling up quickly enough to meet the need.
In other cases, red flags might be thrown. Here are a few examples:
- They need your help to fix a mess. Eg. A sideways project or general bad business practices that have created financial or other organizational problems that run deep.
- They let go of their previous vendor without another solution in place. This is often a sign that they are blaming the vendor for their own mistakes.
- They don’t clearly answer your question when you ask why they need to move so quickly, or just can’t explain it well. (this could be a sign that something else is amiss)
Find out why they are in such a hurry. It could be indicative of deeper problems.
Lucrum tells our prospective clients that we aren’t fire-fighters. We’re not going to come in at year and fix the books just so a new client can file their tax return. We require a 4-month commitment for a couple reasons, the primary one being avoiding the “911” calls.
If you are currently experiencing one of the above situations and need to talk to a small business advisor, our CFOs are here to help. Schedule a complimentary call with one of our CFOs to get the confidence you need to make the next big call for your business.