Brian Hamilton, CEO of Sageworks, made the remark, “ Running a business should earn you an honorary degree given all you will learn.” No kidding, and then some. Sageworks develops financial analysis and risk management solutions for businesses. He had some interesting observations as to what financial mistakes are common in businesses. Are you guilty of some of these?
Is the bank willing to lend you money? Just because the bank is willing to loan you money does not mean you should accept it. A few years ago, things were really tight. Then, the advice might have been – take it! You will need it. The economy is in a better place. The bank is in the business to make money. In general, you should borrow as much as you need to grow your business. “Borrowing money adds a huge burden to your business, a stress that can often cascade into your personal life,” Hamilton warns.
When was the last time you raised your prices? I actually had a dry cleaner tell me recently that she had to lower her prices to obtain enough income to pay the rent. Really? I can predict she will be closing her doors before the end of the year. Costs have gone up. You cannot afford to absorb the costs. You must increase your prices. Brian states that “20 -30% of businesses cannot possibly make a profit – their prices are too low.” With the margins in our industry today, some of you are close to being a “nonprofit organization.”
Stop that trend now. Do an analysis of your costs. Determine your cost per garment. I believe you will be surprised at the result. Plan a price increase. No need to announce it. Just do it. You may lose a few customers but the majority will not even notice.
Do you have one major source of revenue? That one big account that you depend on? What if you lose that big tuna? What does that mean to your business? You must look at your business as you would your financial portfolio. You don’t want the main revenue coming from one source. If this is the case, start looking to diversify. Find some other large accounts to supplement your sales or build more of your over the counter trade. Maybe start a route. Major revenue streams do not last forever.
Another large problem, which can get the best of you, is not paying your Payroll Taxes on time. When you have employees, you are the gatekeeper of the taxes that are taken out of your employee’s checks. Many of you prepare your own payroll checks so it can be easy to forget to make those payroll deposits on time. Or maybe when they are due you just don’t have enough money to cover them. Once this happens, it is almost impossible to catch up. There are penalties, etc. A simple way to avoid this is to hire a payroll service to do your payroll. It is not that costly and is well worth the money. Plus it eliminates that stress on you.
Another no win situation is allowing accounts receivable. Sageworks Hamilton advises, “Unless there is a good reason, you should not offer credit terms to customers. When you offer credit, you are now a bank and a service provider rather than just a service provider. Businesses fail because they cannot collect receivables and manage cash.” Take a good look at your business. If you are a smaller business, why is it necessary to offer an account to your customers? Larger operations, especially with routes, need to offer credit. However, they have a computer system in place that will generate bills on a monthly basis. They use this as a tool to help their business grow.
Cash reserves are very important. Businesses that fail frequently do not have enough cash reserves. A cash reserve helps smooth out those times when things are slow so that you don’t have to go into debt to keep things going. Depending on your situation, you should have from 3 to 6 months business expenses. Try and make this a goal if your cash reserves are limited.
I hope you found this helpful. Sometimes we don’t realize we have a problem until it is too late. I am seeing many dry cleaners closing their doors; I don’t want that to be you.
