6 Small Business Pitfalls, and How to Avoid Them: PART TWO
Welcome back! In the first of this two-part series, we examined the first four of six major small business pitfalls, with tangible strategies on how to avoid them.
The strategies included:
- Get a Jump on the Learning Curve
- Learn to Delegate
- Cash is King. So Avoid the Cash Crunch: Buy & Manage Sensibly
- Don’t Forget About Tax!
Today, we’ll take a look at the remaining two (ultimately the most involved and arguably the most important) strategies for success:
Collecting on Debts
You love your clients. You trust your clients. But you don’t know how to aggressively collect on delinquent accounts without damaging the customer relationship. If you don’t know how to tactfully and effectively get them to pay you, your business will fail.
Joseph has a busy and incredibly successful small business on the go. He occupies a minor monopoly on the market, and as such has more business than he can handle. But he is experiencing an incredibly hard time even keeping his head above water, much less turning a profit. Why? Because he is so busy actually doing the billable work, and not effective in collecting money from his customers.
Here are a few tips for you to make sure you don’t end up in Joseph’s predicament:
It doesn’t matter how large or small the amount – issue an invoice. Nobody wins when you waive off small billable amounts, or say you’ll tag it on to the next bill. Half the time you’ll forget to add it on to the next invoice, or will have a fight on your hands when they don’t remember the billable event. Or the customer will logistically have a harder time paying one big bill than two smaller ones. Or the client may not come back for further business, at which point your billable amount, albeit small, will never be received. You must – if you are in business for yourself – get over the hurtle of asking people for money. You provided a viable service, and you deserve to be paid!
Didn’t get Paid Promptly? Issue Another Invoice
If you haven’t been paid within 30 days of your last invoice, send them another. Maybe – just maybe – they never received the first one. More likely, they filed it away and forgot to pay it. And sometimes they may even have intentionally not paid it in the hopes that you will forget about it.
Sending another invoice reminding them of their outstanding amount and advising that you will start charging interest on the balance is usually enough to get them to fork out the cash. Yes – it will take up more of your administrative time (or that of your assistant), but isn’t getting a paycheque as opposed to not getting one worth it?
Follow up, Follow up, Follow up
After sending out the second invoice, follow up with a phone call a week or two later. If you know that your customer is likely to be trouble, then don’t settle for a “cheque’s in the mail” response. Instead, ask when you or your courier can pick up the cheque. For other customers who you believe may have simply forgotten to pay and who have demonstrated that they aren’t problems, then you may allow them to send the money to you. Just don’t let a bad situation drag on because you don’t want to pressure your customer into paying you for work you have already done.
Problem Customer? Cash on Delivery
If you have a customer who has been late to pay in the past, then simply inform them of a recent change in policy, where you must receive payment up front. Especially if this is a repeat customer with an outstanding invoice, then insisting that they pay up front is reasonable.
Don’t Bend Over Backwards for New Customers
If you set a firm payment policy up front, new customers won’t be offended; they will simply adapt to your method, and will have no indication that this is a change in policy for you. By bending over backwards and giving them deep discounts or being lenient on payment terms, you are only setting a precedent that spells out bad news long term.
It’s not fair that you have to pay your own creditors (for equipment leases or loans) within 30 days, but you don’t hold your customers to a similar set of rules. And in fact, it can create a downward spiral that will spell the end of the business if you are not careful.
The Business Plan – or Lack Thereof
Blake and Bob are both musicians, with stars in their eyes and dreams of fame and fortune at their fingertips. They both are genuinely talented, and have the musical foundation to “make it big”. But each of them have very different approaches to their business.
Bob is incredibly talented, and an excellent musician. But he is flying solo on little more than a wing and a prayer. He claims to know the industry inside and out, but in reality he is fooling himself. When visiting a new place and passing by a club playing his genre of music, he assumes that his type of music is rampantly popular there. He continues to draw far-fetched hypotheses based on very little experience, and has learned absolutely nothing on how to effectively market his music. (Being a musician, the analytical stuff is not something he excels at). He insists that there are undiscovered niches for his music and goes after them with everything he has, only to discover when push comes to shove that he drastically overestimated his income expectations and underestimated the amount of talented competition he is up against. He regularly puts the horse in front of the cart, trying to upgrade his equipment or set up elaborate websites to increase his popularity, when he doesn’t even truly know what his identity is or who his fans are yet. And each time his eyes are opened to the realities of his ill-conceived ideas, his actual music suffers, along with his ego.
Blake, on the other hand, is also incredibly talented, producing exactly the kind of stuff that hits the charts. He forms strategic alliances with movers and shakers in the industry, and diversifies his marketing and musical efforts. When asked what type of music he plays, he can immediately identify himself and his style to you in a concise sentence, even though he has the ability to play across a number of genres (like many musicians). He has a solid identity, knows who his ideal fans are, and exactly how to reach them. His approach to the business is incredibly tactical, and when asked, he can produce a complete business plan illustrating where he has come from, and where he is going as a musician. He also updates his business plan every year, since a year is a long time in the music industry, and his plan adapts accordingly.
Blake’s approach to music is uncommon given that artistic personalities are not usually pre-disposed to such analytical activities as putting together a business plan. But he is really serious about the business, and realizes that in order to be taken seriously, he needs to do what any other business owner should do.
But Bob’s lackadaisical approach to the business and formulating a business plan is not uncommon across many industries. For example, Peter the plumber decides to start working for himself. He is a plumber, and he does it well. What does he need with a business plan? He’s not trying to start a conglomerate; he just wants to stay busy and put food on the table. But strangely and despite his talents and contacts, he ends up going hungry, and asking for his old job back.
The Business Plan is the foundation for every business. We’ve all heard it before, and we may try to do one by going through the motions, but until we truly embrace the business plan as our roadmap to entrepreneurial success, we may flounder in a sea of incompetence.
Your business plan doesn’t have to be over-involved or full of statistics that mean nothing. But it should be on paper, and incorporate the following items:
Description of your Business
What you do, your product or service, and how the business is run.
State what industry are you in, and where the industry is currently going. This is where you would point out any unfilled niches, and how you expect to fill in the gaps.
Exactly who is your customer, where do you find them, and how are you perfect for them?
Rarely will your market be completely un-served by anybody else in the industry. Find a competitor, and find out what they are doing. You may even contact them directly to ask them a few questions and learn from their mistakes.
Find out who they are, how much they charge, and what their position is in the industry.
Exactly how will you market your services? And how will this help you get new business and beat the competition?
Your Experience in the Industry
It is only personal experience in an industry that will truly be your mechanism for success. What is your story?
This is where many business plans fall apart at the seams. With profit and loss statements, operating revenue, and cash flow analyses, even analytical people will turn a few shades paler. Do your best with this, do some research, and read lots about how to read and formulate annual reports.
Although these six business strategies over the last two articles aren’t the holy grail of small business practice and in and of themselves, implementing them will certainly help your chances of succeeding, and with relatively little heartache. If any business owners out there have a few tips or experiences of their own, please do share them with the Wise Bread community!