How to make money in an architecture or design practice

business vehcile change make more money architecture design

A great business-vehicle with a great driver and lots of fuel in the tank allows you to create more great work.

In the past 15 years as a Business-Life Coach I’ve worked with many architects and designers of all types. Design practices and studios are a special kind of business with special challenges around making money and growing. I’m not entirely sure why that is, but I think it has something to do with the design side of things.

Architects have a profession and a set of skills and their business is often built around that set of skills. In that, they are no different than plumbers, mechanics, bookkeepers and lawyers. Their businesses also rest on a set of specific skills and both sell their expertise to their clients. But architects (and designers) often have a passion for their profession that goes deeper. For many architects, architecture is a calling for them. Architects and designers often want to leave their mark on the world with their work. They live for their art as it were and the commercial demands of business can sometimes feel like they are at odds with their art. Making money as an architect is often considered suspect.


Vincent and Pablo

But it doesn’t have to be that way. Of course, we all know the examples of artists who died in poverty and obscurity only to achieve fame and fortune after their death (Vincent van Gogh for example). But equally there are many examples of  artists who created great art, left a mark and were commercially successful in their lifetime (Think of the greats of the Italian renaissance or Pablo Picasso in more recent times). Great art doesn’t have to be created in poverty, and nor does great architecture and design.

I like to remind my clients that making money is never the point of business, whether the business is a plumbing business or an architect practice. A business must make money, and generate good cash flow, otherwise it’s a hobby. But the reason it must make money is so that it can achieve it’s Mission… So that it can make good on it’s Purpose in this world.

No future

I recently worked with a client who is an architect. He employs 4 staff who are all architects or interior designers. The business has only just scraped by for a few years now. The practice creates great work and my client is excited about the potential for making his mark on the world of architecture in the future. But he has only just been making ends meet for the past few years. As a consequence he pays himself very little, less than his staff even, and worse, he may well lose some of the staff he loves so dearly in the future, because there is not enough opportunity in the practice for them to develop and grow professionally. My client feels caught in a dilemma. Focusing on making money and growing the business, he believes, means the work will suffer, and he can’t allow that to happen. Hence the needs of the business come second.

I told my client to think of business as a vehicle. The point of a vehicle is to take us from A to B. But the vehicle can only perform that function, if it’s in good state of repair, if it’s filled up with fuel and if the driver knows how to operate the vehicle safely.

Fuel in the tank

Business is just like that. The point of my client’s business-vehicle is to allow him to deliver great architecture for his clients and to make his mark on the world of architecture in general. In order for his vehicle to be able to do so effectively, it needs to be healthy, in a good state of repair, he needs to be a good driver and it needs fuel in the tank.  Money is the fuel of business and my client needs to learn what it takes to be a good driver, a good business owner in other words.

The demands of business do not have to be in conflict with what you’re passionate about at all. It is perfectly possible to create great architecture, and beautiful design, while making making great profits and building a healthy growing sustainable business at the same time. As a matter of fact, a healthy profitable business allows you to create great art, if you let it… I promise you.

Read more:

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The Ten Priorities; Priority #7: Managing your Finances

Ten Priorities in business, financial management

Ten Priorities in business, financial management

Take control

This is the seventh post in the series of The Ten Priorities: Laying the Foundations for a Great Business and Life. The seventh Priority is about Managing the Money. The introduction to this series on The Ten Priorities is here.

I’ve said before (in priority #3), that a business must make profit, or it’s a hobby.

But in Priority #7 we’re not talking about profit, we’re talking about financial management.

Most business owners outsource the bookkeeping and accounting functions of their business. That’s great, but there are two problems with that:

  • Business owners often misunderstand what accounting is.
  • Reporting arrangements are often inadequate

The misunderstanding is that business owners generally don’t appreciate that there are two different types of accounting:

  • Compliance accounting
  • Financial management accounting

Compliance accounting is simply about how much tax the business must pay. What matters about that, is that it is done properly and timely. But compliance accounting is only the tip of the iceberg.

The most interesting part of the iceberg

The rest of the iceberg, the most interesting part of the iceberg is Financial Management accounting. Accounting that answers questions such as: “Last month, what percentage of our income went to wages?” Or, “In the last six months, which have been our 10 most profitable products?”

And that leads to the second of the problems I mentioned before:

You must get regular reports that give you the answers to the financial management questions that matter to you. And those reports must arrive promptly. I tell my clients to insist that the financial management reports about last month arrive on their desk no later than the fifth day of the new month.

When you sit down with your accountant and bookkeeper and explore with them the financial management questions you need answers to, to build a great business, and insist they give you those answers, every month, your business and your life will never be the same again… I promise you

Next week, Priority #8: Managing your People

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BQ Making Profit and Generating Cash Flow

How can I make more

money in my business?

How do I make more money profit cash flow

A business that doesn’t make profit and generate cash flow is a hobby

The second of The 7 Big Questions of Small Business, on the lips of most small business owners is: How can I make more profit and generate more cash flow? Personally I believe the question about making money is even more important than the growth question, because I have seen many business go bankrupt, even though they were growing. Business Growth only makes sense if you end up with more money in your bank account as a result.

So these are the most important rules about making and keeping money in your business (click on the links for more about each rule below)

Skip ahead to the following sections:

Without profit there is no business, but does that mean that profit is the Purpose of business?

John Mackey is the founder of a large international chain of organic supermarkets called Wholefoods Markets. The company has been highly profitable ever since John founded it in the early eighties and has paid a dividend to it’s shareholders every year of it’s existence. Amazon recently purchased the company for untold billions of dollars and John Mackey is one of the world’s richest people. John clearly knows a thing or two about building great businesses and about making money.

John Mackey also wrote a book however, called Conscious Capitalism (link below) and in it (and various interviews I’ve read and watched with John  Mackey), he says something that made the penny drop for me. He says this:

“Thinking that the Purpose of business is to make money is as silly as thinking that the Purpose of people is to eat food. We need to eat food, we eat food all our lives, and good food is better than bad food and without food we die, but eating food is not the reason we exist. We eat food so we can make good on our Purpose in life”.

John says it’s the same with business and money. The business must make money and profit and generate cash flow,  and plenty of it, but only so that it can make good on it’s greater Purpose.

So let’s be clear about that, making money is the means to an end, and without profit and cash flow, the business can not perform it’s function.

Click here to download my Free Guide to finding the perfect coach or mentor for you.

All about Profit here:

If someone is going to be the most expensive anyway, why wouldn’t that be you?

Everyone can sell cheap. It takes no special skill or approach to sell cheap. It takes incredible skill and focus to be the cheapest and make profit and be around for the long term, and only very few businesses can do so consistently. The only three big ones I know off that have consistently been able to be the cheapest and build sustainable businesses that stand the test of time, are Aldi, Ikea and Walmart. I’m sure there are others but they’re few and far between.

If you make low pricing your main differentiator and competitive advantage you better be the most disciplined and focused business out there, because there will always be someone knocking on the door undercutting you, and you’ll constantly struggle to make enough money to survive, let alone build a Beautiful Business and Life. Competing on price is simply a dog’s game.

Instead: Ask yourself what you need to do to be the most expensive? Raise your prices and see what it takes to sell with higher prices. What else can you compete on? Building a Beautiful Business and Life is so much easier to do with high margins than with low ones.

Click here to download my Free Guide to finding the perfect coach or mentor for you.

More about competing on price here:

20% Of your customers generate 80% of your profit and vice versa… Do you know who they are?

make more money profit cash flow pareto principle You might have heard of the Pareto Principle or the 80/20 rule. The rule can be applied in many situations, but there is no more appropriate topic to apply it to than that of a business and it’s customers. I can just about guarantee you that if you were to run a report today listing all your customers on a continuum with maximum profit and cash flow at one end of the scale down to least profit and cash (or even loss) at the other end, expressed in dollars, you will find that there is a small bunch of customers at either end. There is a small group of customers from whom you make by far most of your profit, and equally there is a small group of customers who cost you most of your money.

The problem is that most small businesses aren’t able to run a report like that, easily. I can tell you it’s worth spending some time pulling a report like this together. For that matter, it’s worth getting the software installed that allows you to run a report like this easily. You will be shocked when you find out how much of the effort in your business gets wasted on customers who do nothing for your business but keep you busy,  who don’t make you any money. Equally you’ll realise how urgent it is to give more attention to those customers that make you all your money, because God forbid they might leave one day!

More about the 80/20 rule and customers here:

The three C’s: Collect Collect Collect. Do you know why it matters so much?

I’ve seen many businesses make profit and grow and yet struggle and even go bankrupt. The problem in those businesses is cash flow. More about cash flow and profit and their tenuous relationship further down. Here I just want to talk about completing the work or delivering the product, invoicing and collecting. It may seem obvious, but making profit is pointless if it doesn’t hit your bank account, but you’d be surprised how often I talk to business owners  who complain about never having enough money to pay the bills while having tens or hundreds of thousands dollars of outstanding debts.

In my own days as a builder, a recurring problem was not finishing the jobs 100%. Sometimes for months, we’d leave a few defects outstanding, because they were small and we were onto the next projects. But that meant we couldn’t collect the final invoice, sometimes for months. In other businesses I see that people finish the work, but wait until the end of the month or sometimes even longer before they invoice the client and finally, most small businesses do not have a simple and consistent collection system. Those three factors mean that your business is functioning as a bank for your customers. Your money is in their bank account and it’s no use to you there. It means you constantly have to rob Peter to pay Paul and you can’t take advantage of early payment discounts from your suppliers and when your business is in growth mode, the problem compounds exponentially.

It’s actually even the case that you’re not doing your customers a favour by not completing, invoicing or collecting. Your customers want nothing more than having their work done quickly and cleanly and when the work is completed well, your clients actually feel they are in your debt and they want to remove that feeling as soon as possible. With every day that passes that feeling of indebtedness changes and if they don’t receive your invoice until a week or a month later, they’re actually not so keen to pay you anymore.

Click here to download my Free Guide to finding the perfect coach or mentor for you.

More about invoicing and collecting here:

Profit and cash are not the same. Do you know what the difference really is?

make more money cash flow profit As I mentioned above, many businesses fall over even though they make profit and they grow. I also mentioned the compounding problem of growth. I’ll explain the compounding problem in a super simplified example here:

Let’s say you start in month 1 with a bank account balance of $1,000 and you sell $1,000 worth of stuff this month and after expenses you have $100 left over. that should mean you are $100 better off at the end of the month than you were at the beginning.

But if you’ve only collect $500 of that $1.000 in month 1, and the balance follows the month after, you’ll be $400 worse off at the end of month 1 than you were at the beginning. The bank account balance at the start of month 2 is now $600. Now if in the next month you grow 20% and sell $1200 and you make the same profit percentage (10%) you will have made a total of $220 ($100 plus $120) profit by the end of month 2.

We’ll assume that you collect at the same level (50%, in the month and the rest follows the month after). So the starting balance at month 2 is $600 plus the remainder of the collections from month 1 makes $1,100. Minus expenses of month 2 ($1,080) leaves a balance of $20, plus collections for the month of $600, so your balance at the end of month 2 is $620. In other words, after 2 months of profitable and growing trading you’ve gone backward by $380. And that’s if everyone pays within payment terms. If only 5% of your customers are late payers, you will go backwards even further at the end of month 2 and so on.

Obviously this is a highly simplified worked example, but it demonstrates the principle precisely. For this reason, in a growing business you must give at least equal attention to cash and profit all the time. You could argue that cash is actually more important than profit for two reasons: Firstly, you can continue to run a business as long as you have cash to pay the bills. There are many examples of big businesses that ran for many years without making profit, but who didn’t run out of cash (Amazon is one such example, Tesla seems to be another current example). And secondly, profit can actually increase your cash stress because profit leads to having to pay tax and tax simply takes cash out of your business.

Click here to download my Free Guide to finding the perfect coach or mentor for you.

More about profit and cash here:

Do you know your breakeven? And why you must hit it 4 times every month?

One of the most important things I do with new clients when I start working with them is to find their breakeven. Breakeven is the number of dollars you have to sell every month (or every day or week or year) to pay all the bills every month. What does it cost to open the doors and turn on the lights, in other words. I find that the simplest way to establish the breakeven is this:

Step 1: Look at last years Profit and Loss statement and find the total of all the overheads, the fixed costs of the business, rent, insurances, electricity, marketing costs, subscriptions, etc. Add to this the monthly repayments of loans and lease payments you have to make. Now divide that number by 12. This is the amount of gross profit the business has to generate every month, 12 months of the year.

Next step: By looking at the P&L for last year (or any other representative period), you’ll be able to see what percentage of revenue your Gross profit is. for argument sake, let’s say that your monthly overheads are $20,000. and that in the past year, your Gross profit has been 30% of revenue. Now we can do the sum to find out how much revenue you need to make, to “Break even”. The sum is: Overheads divided by Gross profit = Revenue. Or in this example: $20,000 / 0.3 = $66,666.00. In other words. Based on last years figures with a margin for error and inflation of 5% added, you have to sell $70,000 of your business’s products or services every month.

But that’s not the end of the story. To survive and actually break even you have to hit this number four times every month:

  • You have sell $70,000 every month.
  • You have to produce $70,000 worth of goods or services every month.
  • You have to invoice $70,000 every month.
  • And you have to collect $70,000 into your bank account every month.

If you miss out by even $1000 on any one of those four in any month, you’ll have to make up for that $1000 in the month after.

By introducing this simple discipline, your business and life will never look the same again. BTW: keep in mind that I’ve been ignoring profit in this topic. Obviously you must make profit as well. But first you must instill the discipline of hitting your breakeven 4 times every month at least.

More about breakeven here:

Numbers: How would you like to be in control of your business?

profit cash money flow finger on the pulse Lastly I always teach my clients how to put and keep their fingers on the pulse of the key aspects of the health of their business, every week and every month. The Numbers, the KPI’s. The break even number I talked about above is obviously one of those key numbers, but there are more. Bank balance is a key number, so is gross profit and aged debtors. Then there are various financial ratios, such as the gross profit percentage and ratios like “The debtor days ratio” and the “Liquidity ratio”. More detail about ratios etc below.

Besides financial numbers and ratios, there are many other numbers and ratios in a business to keep an eye on. For example the number of enquiries in the past month, or the conversion rate (for every 10 enquiries, how many contracts were signed), average job value, or average sale. Warranty returns, customer satisfaction, you name it.

A client of mine who has a furniture removals business knows that he needs to keep a keen eye on his removalist’s wages as a percentage of total sales. If he spends more than 60% of sales on the wages of his boys, he knows he’s not managed the work schedule well enough.

Your business will have its own specific numbers and ratios that can tell you a lot about the health of your business. I often talk about the mailboat report with my clients: Imagine you are banished to a deserted island in the Pacific, without mobile phone or email, and the only information you could get about your business would be a single sheet of paper that would be delivered by the mailboat every week. What numbers would have to be on that single sheet of paper to tell you precisely what you needed to know about the health of your business, so you could send immediate instructions back with the mailboat?

Click here to download my Free Guide to finding the perfect coach or mentor for you.

More about numbers here:

 

How to get paid in your business

angry eyes

This is a guest post by Liz Parsons more details at the end of this post

angry woman

Don’t let unpaid invoices cripple your business

Having provided goods or a service to a customer, you’d think that getting paid would be the most logical thing to happen next. Sadly this isn’t always the case, and each year small businesses struggle to get the money they are owed – causing huge problems with paying for materials, future planning and ensuring staff get their wages.

This is a bigger issue than many people realise. Although this is a problem throughout the world, in Australia, research has estimated that an average small business is owned up to $13,200 in unpaid invoices.

However, there are ways in which you can approach business to ensure that unpaid invoices don’t cripple your business. Here are just some of them…

Ensure that there are consequences for late or non-payments

For a small business, it can be difficult to find the balance between wanting to chase to ensure that you get paid, but also not wanting to drive your customers away by harassing them. However, if a customer is not paying you, then perhaps they are not the type of customer that you want. As a business, you need to be firm in your belief that you deserve to be paid, and you should do all you can to make sure this happens. One way to encourage prompt payment is to have consequences for late payment, such as adding on an interest charge for each day over the invoice due date. We recommend using the Reserve Bank of Australia’s base rate (1.5% at time of writing) to set a daily amount which will be added onto the total bill until payment is made.

Find out as much as you can before you agree to do business with someone

This can be dependent on what sort of industry your small business sits in, but if it’s possible to find out more about your customers before agreeing to work with them then do so. Try to find out if they have a good reputation, or if there have been any concerns raised about them in the past. Also, depending on the size of their business, look to see if they have a finance department or at least a person dedicated to paying the bills. This can indicate if they are formal in their approach to invoices, or if it’s all a bit ad hoc which can lead to missed payments. If alarm bells ring when you do your research then consider if this is the type of customer you want, particularly if there is a risk they won’t pay at all.

Put in measures to help when selling to overseas customers

Selling overseas has many challenges, including ensuring that you get paid. The lag between the time it takes for someone to receive the goods if they don’t live in Australia naturally adds to the time you can expect to get paid, so if an invoice is then late it can cause some real problems. If your business buys and sells goods overseas, then you may wish to consider using trade finance. This is a way of taking out a loan which can act as a bridge helping you to pay for the goods, while waiting to be paid by your customer.

Don’t give up

Chasing payments can be a thankless task and one which, as a small business owner, you might think you simply don’t have time for –  but it’s important to not give up. You’ve done your job, so you have every right to be paid. Ensure that you chase as soon as the invoice is overdue, and then chase again every week after that. Set yourself a time limit, say eight weeks, after which time you will go further – contacting a debt recovery agency to seek the money you are owed.

Guest post

Unpaid invoices are more of a problem than most people realise. If unchecked, these can lead to financial loss, redundancies, or even bankruptcy. To discuss the issue, Liz Parsons – working with World First – states how to prevent these from occurring.

Would you like to download my free 12 Question Cheat-sheet to help you find your next Coach? Click here.

Driving your business forward by getting under the bonnet

under the bonnet KPI

Guest post by James Bright, details below.

bright and co get under the bonnet kpi

How KPIs and Happy Meals fit together

Business Drivers or Key Performance Indicators (KPIs) are critical information to running successful businesses.  They are used by all levels of management in large business to monitor and identify trends in the business and make ongoing adjustments. But understanding KPIs and using them to manage your business is just as important in small business as it is in large organisations.

Typically, KPIs consist of both financial and non-financial numbers.

The key to establishing them in any business however, lies in intimately understanding the business and narrowing down to the critical indicators of the health of your business. The indicators that really tell you what’s going on and how the business is tracking against its strategies.

A course I did recently outlined McDonalds Australia’s business drivers and what their CFO tracked to get an overview of the business.  The KPI “dashboard” contained approximately 25 business drivers such as:

  • Gross Margin
  • Staff Turnover %
  • Total Sales per Store
  • Customer Satisfaction

One number to rule them all

All pretty dry and unexceptional numbers, but one stood out. Amongst the list of classical accountancy numbers was a single, surprising and simple KPI that summarised the overall health of the business.

So what was this magical KPI?

The number of Happy Meals sold that week….

When you consider this, it makes perfect sense. If Happy Meals are selling well it means many other things must also be true:

  • Advertising is obviously working as the kids are pestering their parents to go to McDonalds.
  • If Happy Meals are being sold you can bet that other products were sold on that same order as the parents or older children ordered something as well.  This means higher top line sales, and higher $ value per total order.  All impacting positively on Gross Margins.
  • Customer satisfaction is obviously positive as what kid doesn’t love a Happy Meal, and what parent doesn’t enjoy 15 minutes of peace and quiet?

It was an interesting lesson, most specifically because many small and medium businesses use financial data such as gross sales or profit to review performance and look for trends.  Perhaps there are non-financial KPI’s that you can use to get a deeper insight in your business. Maybe you can identify your own “Happy Meal” KPI.

Get under the bonnet

The biggest opportunity in the development of your small business is to work out what the critical KPIs for your business are. Finding your KPI’s starts by conducting an objective review of your business from the outside looking in.  It forces you to really get under the bonnet.

Ask yourself questions, such as:

  • Why do my customers buy my product or service?
  • Do they generally come back?
  • Do they recommend me or my product to their own networks?
  • What is my sales pipeline and how does it connect to my delivery and ongoing service or support pipeline?
  • If I am making products what are the elements in this process that set me apart from the competition?
  • Are my employees satisfied and is that being conveyed to my customers?

Ultimately conducting this analysis of your business would yield a few critical business drivers that are aligned with your strategy.  These can be used to establish the same insights as the largest businesses that will allow you to monitor and review the trends and make the necessary adjustments to ensure your ongoing success.

What’s also important to consider is your ability to obtain and synthesise data from your systems, ultimately turning it into information for decision-making.

Do you know what your business critical KPI’s are and are you tracking them in a consistent manner in order to gain the right insight into your business?

Read all about Money, Profit, cash flow and keeping your fingers on the pulse here

bright and co KPI Guest post

This article was written by James Bright of Brightandco Pty Ltd Virtual CFOs and Accountants in Sydney.

James and his partner Alex are accountants and financial management experts and are passionate about helping small business owners take control of their business, by getting under the bonnet.

www.brightandco.com.au

Virtual CFOs and Accountants

Payment terms and cash collection systems in small business

Payment Terms Cash Collection

Payment Terms Cash Collection

Make your slow-payers an offer they can’t refuse

I have a very good friend who has a small business that relies on his expertise. Clients come to him to resolve very specific and very complicated challenges. The people my friend works with are artists, promoters, designers, producers. The art world in other words

My very good friend is a bit of an artist himself, to be honest. But he’s also an absolute expert in his field. As a matter of fact there are few, very few, people with his level of expertise anywhere in the world.

So clients come to him when they want the best help in the world, when they want their project to win the big international prizes and when they want every single little detail seen to perfectly.

Given it’s a small niche that my friend operates in, a tiny one in fact, I’ve been surprised to see over the years how well my friend has done for himself.

But he continues to have cashflow struggles, every year again.

I found out why, the other day.

Being the last one to get paid

My friend doesn’t have payment terms or a collections system. And consequently, some of the people in the art world who are his clients, use him like a doormat. Time and again. Every year some of his clients think it’s ok to pay him last, after everyone else has been paid. Sometimes he doesn’t even get paid at all.

My friend doesn’t like systems. He doesn’t like bureaucracy and he doesn’t like policies. And he especially doesn’t like implementing systems to do with money. He operates in the art world and in the art world, money is treated as a necessary evil at best and as the devil’s spawn at all other times.

I get it. The people who engage him may be at the top of their game, but most of them don’t make enough money to pay the rent. They’re struggling artists. And my friend empathises with them and more importantly, he believes that part of what his business is on this earth for, is to facilitate the presentation of important art to the world.

Cash is the food in your business

That’s his Purpose, and as those of you who’ve read some of my musings in the past know, the Purpose of business isn’t about making money. I like to quote John Mackey, the founder of the multibillion dollar company “Whole Foods Markets” in the USA. John Mackey says that money is like food for a company. The food it needs to live and fulfil on its great Purpose on this earth.

Without food, adequate nutritious food, the company cannot fulfil on its Purpose.

My friend’s business must make money, cash, so that he can present the important artwork he’s involved with to the world in the best possible light, and so that his company can continue to do so for many years to come.

In our society, there simply is no other way.

And that means, my friend must put in place payment terms and collections systems and stick to them.

Sample payment terms

It’s a simple matter of adding a couple of standard conditions about payment to each proposal and each contract such as:

  • 50% of each contract is paid up front.
  • 35% is paid before delivery of the work.
  • 15% is paid within 7 days of completion.

These are normal commercial terms. The promoters and producers and designers will recognise them for what they are, because if they are professionals themselves, they most likely have similar terms in place in their own contracts.

Once implemented, my friend needs to stick to those terms religiously and run a collections system as well.

A simple collections system

A collections system can be very simple, in the above example of 7 days payment terms, it could look something like this:

  • On day 8, a friendly reminder email goes out, asking if the invoice has been received and attaching another copy of the invoice. (Use a standard scripted email template)
  • On day 15, a phone call is made and a commitment is asked to a date by which the payment will be made in full. (Simple script for the phone call, so you avoid the awkwardness)
  • The day after the date the client agreed on, if the payment has not been made, a final demand is sent by email, with a date by which the payment is to be made and stating that: If payment is not made by that date, the debt will be forwarded to a collections agency, and that any collections costs will automatically be added to the outstanding amount. (Another standard scripted email template)
  • On this final date, the owner makes a phone call and a last email is sent (more scripts), warning that the debt is about to be passed to the collections agent. Email and phone call will remind the client that collection costs will be added to the debt.
  • The next day, the debt is forwarded to the collections agent. The client is advised that this has happened and that any collection costs will now be added to the debt. The business owner ceases to let it bother him or her, because it’s now dealt with by someone else.

This sounds like a harsh and inflexible system.

And it is, or rather it’s professional and clear.

Those people are liars

Payment Terms Cash Collection It needs to be. When people don’t pay, and they are given significant extra time to pay and they make promises to pay, but they don’t, they are liars and they have your money in their pocket.

My friend doesn’t like to implement a simple system such as this, because he thinks the artists won’t respect him in the morning and he (like all of us) really wants to be respected in the morning.

I told my friend three things:

  • If you implement a system such as this and you run it religiously, without fear or favour, you will be seen as a professional. In fact this is the most effective way to gain respect.
  • Who wants to be respected by people who are liars, who can’t organise their lives like adults and who think it’s ok to treat a person like you as a doormat?
  • Payment terms and collections systems, run consistently, work. They generally, at least, halve the number of issues businesses have with slow paying clients.

Implementing a payment and collection system and running it, religiously, means you’ll be treated as a respected business owner, not a doormat… I promise you.

FREE eBook: The 10 Truths for Raising a Healthy, Bouncy, Business

How to Raise a Healthy Bouncy Business  


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What sinks more business than anything else?

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A Taste of My Own Medicine

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Winning the lottery

Or… what to do when you don’t

Are you expecting a tax refund? And if so, what will you do with it?

windfall

The question recently popped into my head while reading about an innovative new working capital loan provider for small business called Kabbage who are expanding into Australia.

It is a nice question to think about.

What would you do if you had an unexpected windfall in your business?

I suppose you could just pull it out and treat yourself, nothing wrong with that.

Stop and think about it for a moment…

Monopoly

monopoly What would you do if you suddenly had an extra $25K to play with in your business… The old monopoly card: “The bank has made an error in your favour, please collect $25,000”

I won’t tell you what to do with the boon… your circumstances are unique to you… But how might a financial injection without any strings attached change your life?

Let me tell you what I’d do:

I’d spend the money on a digital marketing campaign. Maybe 12 months at $1500 per month (and a $7000 for a nice holiday with my wife.)

$1.5K a month would get me a high quality digital lead generation specialist, such as Motive Marketing in Sydney and I’d get them to design and run a marketing campaign in Facebook, Google, Linkedin and wherever else to get people to download my book – The Ten Truths for Making Business Fun.

ROI

You see it’s all about ROI, return on investment.

My theory would be this: If I spend $1500 per month over a year on lead generation, I’d need to have maybe 500 small business owners downloading the book… that would be 6000 in a year and if I get 6000 small business owners to download my book and I start talking to them with my articles, videos, webinars, surveys and all kinds of other free tools and resources… a small proportion of those 6000 people will ultimately become my clients… I would expect that it would not be unreasonable to expect that over time between 10 to 20 people who download my book will become paying clients of mine.

Now that would be an amazing ROI. when you think about it… 15 clients are worth around about an entire year’s revenue for me, so by spending $18,000 I gain a year’s income…sounds like a brilliant investment, doesn’t it.

And I’d get to have a nice holiday as well.

Hang on… lets look at that again

But wait a minute… The question was: What would you do if you had a sudden windfall in your business… what would you do with it… Obviously I just outlined a great investment, but what’s to stop me from making that investment anyway?… why don’t I go and talk to Scott from Motive Marketing and work out a plan anyway… if the investment is that good, I’d be a mug not to make it anyway right?

That’s  why the question came up for me when reading about Kabbage… if it’s a god enough investment, why not go and borrow to money to do it anyway… valid argument I think.

medicine Well, rest assured… Scott and I will be talking in the coming weeks (he doesn’t know it yet, but he’s getting a phone call from me next week.

But what about you?

Are you holding off on making an investment because you haven’t got the money yet?

I hear it a lot when I talk to prospective clients: “Well, I’d love to work with you, when I can afford it” … really… Maybe you could argue that once you can afford me, maybe you don’t need me anymore… the question is: Can you afford not to work with me.

Think about it… in the mean time, I’m calling Scott… time to take my own medicine.

 

Financial Management

profit

Why cash is more important than profit

register for webinar

What does it take to make a success of your small business… how can you avoid adding to those frightening statistics about failure rates of small business. 

In this series of articles and associated webinars and workshops, by Roland Hanekroot you will learn the basic concepts and get the knowledge you need to become a successful ‘Business-Owner’, as opposed to a struggling ‘Business-Doer’.

Format

The format of each episode in the “First Steps” series is to explain the basics of the topic and then in line with the principles of New Perspectives business development programs, to suggest some small simple “First Steps” you can take straight away to put the knowledge into action.

Financial Management

profitIn the fourth of these articles we’ll look at the Financial Management and ask:

What do you need to know and how do you need to apply that knowledge to put your business on a solid financial footing?

3 Principles

There are 3 principles you need to understand to manage the finances of a business well:

1)    Why do we need to make profit?

2)    Profit and cash are not the same thing at all and they don’t even have a direct relationship between each other.

3)    Cash is what you must worry about all the time… not profit

Why Profit?

Let’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in my article about Purpose and Vision click here)

Why Profit?

Let’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in my article about Purpose and Vision click here)

The 3 Functions of Profit

Profit has 3 functions:

1)    To pay investors and stake holders in a business a return on their investment.

2)    To provide the business with funds to invest in itself to grow or develop the business.

3)    As the thing by which we measure how well we are doing in running the business.

The first function is straight forward, if someone invests $100 or an hour’s work into a venture, that person wants to see a return for that investment. That return can only be payed out of the profits of the business.

The second function is also straight forward, in that, if you want to buy a new machine or tool or vehicle for your business you need to have the money to pay for that. Profit is what provides that money. (You can borrow for that purchase of course, but then the purchase is effectively made out of future profits)

The third function is about this: How do we know if our business is going well or not so well? The simplest method to answer that question is to keep track of the financial numbers and profit is one of the most important of those.

Profit and Cash

The second principle about profit and cash is what brings a lot of small businesses unstuck. A large proportion of the businesses that make up the horrendous statistics on failures in small business do so because of a lack of understanding of this principle.

Profit is a simple sum (on paper) of sales minus costs. So if you sell stuff in a week for a $100 and it costs you $50 in raw materials that week and $25 in office costs, it means that you have made $25 profit that week.

river Cash (your bank balance) bears little relation to those numbers in most cases. The $100 of stuff you have sold might not be paid for that week or even that month. You also might have had to pay for the raw materials some time previously and your office costs (staff and rent etc) may have to be paid every Friday. So that at the end of the week your bank account will actually be significantly in the red even though you’ve made a profit.

Cash Flow

So cash needs to be calculated in a different and slightly more complicated manner than the simple profit and loss equation.

When thinking about cash it is useful to think in terms of flow… money flowing in and out of your account, like a river flowing into the sea. If it rains upstream in Queensland for example, it may take a month for the Darling River to start swelling downstream in South Australia. So when talking about cash we usually talk about cash flow…. Money flowing in and money flowing out. If more money flows into your bank account in a given period than flows out in that period, your bank account swells and vice versa.

Cash is the main thing

cat And that brings us to the third principle that you need to understand about financial management of the business.

I said that the thing to worry about in your business is Cash and not Profit. For most people this is a counterintuitive statement.

The truth of this principle is actually much more straight-forward than you might think, because:

Only cash can be used to pay for stuff

Theoretically, your business may never make a profit and yet survive, as long as you continue to have enough cash to pay the bills, your staff, your raw materials, the rent etc. Obviously without making a profit, the business will ultimately run out of cash, but that can take years in some circumstances. So as a business owner who is committed to put his business on a solid financial footing, Cash-flow must always be your first concern.

This is the topic we will be talking about at the March Small Business Masterminds ‘live’ workshop as well as the Masterminds online webinar, both on 13 March. If you would like to attend either the webinar or the workshop, go to http://smallbusinessmasterminds.com.au 

Take the first steps:

As mentioned in the opening paragraphs of this article, I will suggest some “First Steps” actions you can take right away, that will get you started on implementing the topics and principles we discuss:

  1. Download the Article by Roland Hanekroot: “Cash-flow, the Basics”: follow this link
  2. Have a look at a great blog post on the Times of London about the importance of profit in business: Follow this link
  3. 5 ways to improve your cashflow in INC magazine: Follow this link
  4. If you are not already doing so, start by paying yourself a regular “wage”. A weekly or monthly amount you can live on as a minimum, and record this wage in your books as an expense to the business. You may decide to invest this money back into the business if you don’t need it to live on, but by paying yourself such a wage you will gain a more accurate insight into the profitability of the business and you will start to see how much money you are actually investing into the business and therefore should get a “return” on in the future.
  5. Start a proper bookkeeping program (Xero, MYOB, Quickbooks, Saasu, Freshbooks) and ensure it gets kept up to date at least monthly.
  6. Ask your accountant or bookkeeper for a simple cashflow spreadsheet and either start to use it yourself monthly or ask your bookkeeper to do so for you, you’ll be surprised how easy it is to start to get a handle on the cash flowing in and out of your bank account.

About the author and the Masterminds sessions

roland

Roland Hanekroot is a business coach who works with Small business owners to help them have more Fun in their businesses and build businesses that sustain them for years to come. Roland is also the author of “The Ten Truths books for Business owners” (more about the books here: http://thetentruths.com.au)

Every month Roland Hanekroot runs a business development workshop as well as a webinar called “The Small Business Masterminds” more information here and to register for the next webinar or workshop, follow this link: http://smallbusinessmasterminds.com.au/ The first time is free.

 

The First Steps to Sound Financial Management of Your Business


the simple steps cogs First Steps to Sound Financial Management of your business

©by Roland Hanekroot, New Perspectives Coaching 2013

success and failure

What does it take to make a success of your small business… how can you avoid adding to those frightening statistics about failure rates of small business.

In this series of articles and associated webinars by the authors of “The Simple Steps for Business Program” you will be introduced to the basic concepts and knowledge that will set you up to become a successful ‘Business-Owner’, as opposed to a struggling ‘Business-Doer’.

Format

The format of each episode in the “First Steps” series is to explain the basics of the topic and then in line with the principles of “The Simple Steps for Business” program, to suggest some “First Steps” you can take straight away to put the knowledge into action.

In the first of these articles we’ll look at Financial Management: What do you need to know and how do you need to apply that knowledge to put your business on a solid financial footing?

3 Principles

There are 3 principles you need to understand to manage the finances of a business well:

1)    Why do we need to make profit?

2)    Profit and cash are not the same thing at all and they don’t even have a direct relationship between each other.

3)    Cash is what you must worry about all the time… not profit

Why Profit?

profitLet’s address the principle about Profit first. The first thing to understand about profit is that it is not the purpose of business. Profit is a vital component of business, but it isn’t the reason the business exists. The Purpose of your business must be something much more important and something your customers actually care about. (More about this idea in the article about Purpose and Vision)

The 3 Functions of Profit

Profit has 3 functions:

1)    To pay investors and stake holders in a business a return on their investment.

2)    To provide the business with funds to invest in itself to grow or develop the business.

3)    As the thing by which we measure how well we are doing in running the business.

The first function is straight forward, if someone invests $100 or an hour’s work into a venture, that person wants to see a return for that investment. That return can only be payed out of the profits of the business.

The second function is also straight forward, in that, if you want to buy a new machine or tool or vehicle for your business you need to have the money to pay for that. Profit is what provides that money. (You can borrow for that purchase of course, but then the purchase is effectively made out of future profits)

The third function is about this: How do we know if our business is going well or not so well? The only clear method to answer that question is to keep track at the financial numbers and profit is the most important of those.

The Simple Steps for Business … First steps:

As mentioned in the opening paragraphs of this article, we will suggest some “First Steps” actions you can take right away, that will get you started on implementing the topics and principles we discuss:

1)    Have a look at a great blog post on the Times of London about the importance of profit in business follow this link to the resources page for this topic

2)    If you are not already doing so, start by paying yourself a regular “wage”. A weekly or monthly amount you can live on as a minimum, and record this wage in your books as an expense to the business. You may decide to invest this money back into the business if you don’t need it to live on, but by paying yourself such a wage you will gain a more accurate insight into the profitability of the business and you will start to see how much money you are actually investing into the business and therefore should get a “return” on in the future.

3)    Start a proper bookkeeping program (Xero, MYOB, Quickbooks, Saasu, Freshbooks) and ensure it gets kept up to date at least monthly.

Profit and Cash

The second principle about profit and cash is what brings a lot of small businesses unstuck. A large proportion of the businesses that make up the horrendous statistics on failures in small business do so because of a lack of understanding of this principle.

Profit is a simple sum (on paper) of sales minus costs. So if you sell stuff in a week for a $100 and it costs you $50 in raw materials that week and $25 in office costs, it means that you have made $25 profit that week.

Cash (your bank balance) bears little relation to those numbers in most cases. The $100 of stuff you have sold might not be paid for that week or even that month. You also might have had to pay for the raw materials some time previously and your office costs (staff and rent etc) may have to be paid every Friday. So that at the end of the week your bank account will actually be significantly in the red even though you’ve made a profit.

Cash Flow

river So cash needs to be calculated in a different and slightly more complicated manner than the simple profit and loss equation.

When thinking about cash it is useful to think in terms of flow… money flowing in and out of your account, like a river flowing into the sea. If it rains upstream in Queensland for example, it may take a month for the Darling River to start swelling downstream in South Australia. So when talking about cash we usually talk about cash flow…. Money flowing in and money flowing out. If more money flows into your bank account in a given period than flows out in that period, your bank account swells and vice versa.

The Simple Steps for Business … First steps:

1)    Read this article: “Profit is a liability”, about the difference between profit and cash-flow by Roland Hanekroot follow this link

2)    Here is an article in Inc. Magazine: “5 Ways to improve your cash-flow”. The article explains the long term strategies for improving your cash-flow dramatically. Read the article and ask yourself what steps you can apply in your business:follow this link

Cash is the main thing

cat And that brings us to the third principle that you need to understand about financial management of the business.

I said that the thing to worry about in your business is Cash and not Profit. For most people this is a counterintuitive statement.

The truth of this principle is actually much more straight-forward than you might think, because:

Only cash can be used to pay for stuff

Theoretically, your business may never make a profit and yet survive, as long as you continue to have enough cash to pay the bills, your staff, your raw materials, the rent etc. Obviously without making a profit, the business will ultimately run out of cash, but that can take years in some circumstances. So as a business owner who is committed to put his business on a solid financial footing, Cash-flow must always be your first concern.

The Simple Steps for Business … First steps:

1)    Article by Roland Hanekroot: “Cash-flow, the Basics”: follow this link

2)    Ask your accountant or bookkeeper for a simple cashflow spreadsheet and either start to use it yourself monthly or ask your bookkeeper to do so for you, you’ll be surprised how easy it is to start to get a handle on the cash flowing in and out of your bank account.