November 14, 2019

How much do your customers owe you?

If you go overdrawn at the bank, they are quick enough to let you know you have their money if it is not by prior arrangement. And they charge you to let you know and charge interest until you pay them back.

Birmingham-20121029-00115Would you be better off if you treated your customers the same as the banks treat theirs? It may be that you wouldn’t want to upset your customers and you would rather they did not go to the competitor every couple of years. But, you are in business. If people buy from you, they should expect to pay. It is up to you to make it clear before they buy, when you are expecting payment to be made.

If you operate with a bank overdraft, you know all about paying interest. If all your customers paid you within the terms you lay out at the start, how much smaller would your overdraft be? How much less interest would you be paying – all that then becomes profit and can either be used elsewhere in the business or be enjoyed by the business owners.

Many business owners don’t like to charge customers interest, but the banks have no problem! Remember, the alternative to charging interest is to either make sure you are paid before the work is done, or depending on the industry, issue credit terms and make sure you have a system in place to chase the moment an invoice becomes overdue, relentlessly until it is paid.

Penny LoweI do suggest a system as otherwise you can find you spend more time chasing money than making it. If you do find this is the case, you may need to revisit some more basic questions such as why do customers feel they don’t need to pay. Do you need to charge some customers a premium as you guess from the start they will be late payers? Do you need to hire someone to get heavy as you would rather keep them sweet for the next purchase they choose to make. I have been used as an excuse – and a threat when my clients are chasing money. My accountant is worried that you might be unable to pay and won’t let me do any more work until you do. If you don’t pay, you will leave me no choice but to pass this debt over to someone else to deal with (accountant or small claims court).

The trick is to be consistent and this is another reason to have a system. If ‘it’ can chase for you, it will free up time for you to do the more profitable tasks.

What tips do you have for making sure your customers pay? Enter your comments below.

What are your costs of distribution?

A cost that is often overlooked when deciding on prices, or considering profitability is the cost of getting your product or service to the customer. Whether it is you travelling to a meeting at your customer’s location or the cost of postage and packaging, they are each costs you would not incur if you had not made the sale.

What bought this home to me was the cost of distribution of my, soon to be launched, book. I could buy padded envelopes from W H Smiths at 99p each (or 3 for 2) or I could buy 100 for under £10 with free delivery on 300 or more. That was just the first cost. There was then the cost of postage. I am glad I have a franking machine but it still over £1 second class.

The costs can mount as much and more when delivering yourself. Parking at the station, the cost of the train fare, taxi to and from at the other end. I know that today I will spend more on taxis than the pre-booked train fare but this is still cheaper than driving at 45p per mile – and I can get some work done on the train. This cost of travel can make quite a dent in the daily rate. I know I am doing more work locally and from my office. I have no travelling costs or time involved so I don’t have t have the conversation about why they should pay for me to go to them. To be fair, my daily rate is less when they come to me as I know I can do chargeable work when I would otherwise have dead time while I was in the car.

If you have engineers or technicians on the road, just consider what the costs are. I am not saying you shouldn’t offer the service, I am saying make sure you build in the cost when calculating the price. The idea of being in business is to make a profit, not just deliver a fantastic service. If you don’t make a profit, you will not be able to continue which means that people will be deprived on the quality products and services you offer. If you do not get the figures right, you cannot continue.

Are you working to a budget ?

Budgets are not just for large firms. Every business can benefit from creating a budget. They can benefit further from using that budget to plan cash flow and monitor progress.

 

Tax return sooner rather than laterWhen you sit down to create a budget you validate the overall strategy for your business. If you have not written down your plans, it may be that creating the budget forces you to actually deicide what you are trying to achieve and then, if you have the resources to do it. One critical resource is manpower. Although you can take on more staff or freelancers to help out, they will need training which will divert other members of staff from their primary staff. This is not a problem, providing it is built into the plan.

 

The other resource to consider is cash. Can you afford to buy the stock to fulfil your projected orders? This leads me nicely to propose that, following the preparation of a budget, you should also prepare a cash flow. As with all plans, if you know there are going to be times where cash is tight, it is not a problem if it is part of the plan.

 

Having created your budget and planned your cash, the next stage is taking action, and then monitoring. There is little point preparing a budget if it sits on the shelf. I am a strong believer in working with businesses to create their budgets. If they know how the projections were arrived at, they can validate them as they go, and have the understanding to update them if needed.

 

The title of this was not do you have a budget, but are you using the budget you prepared. What is your answer?

When did you last claim expenses ?

There are 3 good reasons why you should put in an expense claim:

1. You have paid out money on behalf of the firm so they owe it to you
2. The firm needs to know what it has paid out/costs it has incurred otherwise it is working with an incomplete picture
3. If expenses are to be recharged to the customers. They should be included before the customer forgets they agreed to pay for them.

Whether you work for someone else, or yourself the same three rules still apply. The sooner you put the expenses in, the sooner you can be paid and the firm knows it has a liability.

You might trade as a sole trader and the concept of expenses seem strange. The same rules apply. If you pay parking of, on average, £2 per day and record it for 45 weeks of the year that amounts to £450 worth of costs. So, if you pay 20% tax and 9% NIC that is £130.50 extra you would need to pay in taxes if you didn’t make the claim.

For many small expenses such as parking, you cannot always get a receipt. HMRC understand this providing you are making notes and claims as you go rather than inventing a lump at the end of the year. It may be that your bank statements show when you had to park to go to the bank. As well as the parking, don’t forget to claim the mileage unless the business owns the car and pays for your petrol.

Other amounts often overlooked are postage, paper (when bought from Tesco’s with the week’s shopping), car washes and charity donations. All are allowable and some do have receipts, others don’t. If some of the items on the receipt are business and some not, then include the receipt and just mark which you are claiming for – at least you have proof that the money was spent.

The important thing is to do it while you still remember – Happy to chat things through with you if I can be of help

Are you charging enough ?

 

What is enough for you? This leads from the question ‘why are you in business?’ This week I had a client who greeted me with the comment: “Every year when I drive over with my books, I tell myself I really ought to put my prices up”.

She provides her services mainly to the elderly in care homes with limited incomes. Her children have both left home and the second one is now going through university. Her main reason for working was to pay for their education, but she also enjoys her work. Do you think she should put her prices up?

Pricing is not all about making the greatest profit you can, it is about understanding the figures so you can decide what is appropriate. Do you want to price yourself out of the market, or just appeal to a small niche? Someone I worked with a couple of weeks ago had just taken an order for a dining table at £35,000. That is not a typo. I can confirm that I will not be placing a similar order.

In order to ensure you make a profit, you do need to understand what costs are involved, both in the delivery of that particular sales and in the running of the business. If you don’t have precise figures available, just jot down what your overheads are in a year divide, by twelve and realise how much you need to make in a month before you even consider the costs involved in a sale. This is why you cannot afford to work for free. By all means give a sample or taster away, but make sure your customer knows this is not the norm.

If you feel that you need to talk through your pricing structure please get in touch