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3 Simple Steps to Improve Profitability

April 2, 2008
URL: http://www.entrepreneur.com/article/192140

"I want to be big!"

This is what ambitious startup entrepreneurs often say when they talk about the goals of their new organization.

Of course, the definition of "big" varies considerably. Most first-time entrepreneurs would be thrilled to manage a $100,000 revenue generating company; whereas others define success in multiples of millions.

Still, I wonder. Why is it that I've never heard a first-time entrepreneur say, "My goal is to be really, really profitable?" After all, isn't it more important to earn $1 million after paying all business expenses than generate $1 million in customer sales? I think so. It's what you keep that matters.

Here's something else to think about. You never find a company with strong, positive cash flow and profitability in bankruptcy court, but you can easily name companies with million-dollar annual product and service sales that turn their fate over to bankruptcy judges. Simply stated, being "big" doesn't matter if you can't pay your bills.

Here are three easy-to-implement strategies to improve your company's cash flow and profitability.

Step 1: Cut out unprofitable products and services
Today, it's not hard to find businesses that keep selling products or services that just don't make any cents. That's right ... no profits at all.

For example, several years ago I was hired to advise a near-bankrupt guitar manufacturer. Even though this company made beautiful, rich sounding guitars, a significant percentage of its designs were clear money losers.

My wake-up question to management was, "Which announcement is more difficult: Telling employees that the company will no longer make unprofitable guitars or telling employees that the business will close?" Changes had to be made.

Here's another example. A friend of mine offers running classes throughout the Pacific Northwest. Her beloved training sessions for elite runners are time-consuming and poorly attended, primarily because the smaller market of fast, trim runners really don't need her help. Yet, her training sessions for out-of-breath joggers are always packed. Which service line should be emphasized in her business mix? Sometimes the things we love to do most are best kept as side hobbies.

Step 2: Target new customers from within groups
We all know the saying, "Time is money." Time allocated to actually serving customers earns money. Time allocated to administrating and soliciting customers, costs money. Obviously, more profitable businesses spend the least amount of time as possible on business activities that don't bring in money.

I once sat next to a software engineering consultant on a flight to Atlanta. He complained that he spent most of his business time flying to customers in Europe and all over the United States. While he said he "had no choice" and felt he had to cast a wide, random net to reel in new customers, I believed there was a less exhausting way to acquire customers and cash flow. I explained that he could improve his operating efficiency by soliciting new customers in tighter "customer communities." This means marketing to customers within a smaller geographic area. The point really hit home when I said that one person should not try to create a global sales empire!

I also suggested that solo entrepreneurs leverage their time best when they focus on customers within one or two specific industries. The benefit of industry-oriented marketing is to gain a reputation for industry expertise. This, in turn, leads to higher service rates and industry referrals, which reduces sales costs and increases revenues. Can every entrepreneur manage this time-saving tactic? Yes!

Step 3: Outsmart your deadbeat customers
There are two types of customers you don't want to serve-the slow payer and the no-payer. It's foolish to think that all customers will pay your bill on time, if at all. The longer you have to wait to collect payments, the more money and time you lose in the chase. I say, stop the madness! While accountants might quibble with me about the definitions, sales, in my view, only count when you collect a check ... that doesn't bounce.

The best way for service-oriented businesses to take command of collections is to require a down payment before buying supplies or starting any work. Product sellers can reduce their nonpayment risks too by not accepting large first orders from unproven customers. It is, after all, a well-known tactic of troubled companies to over-order supplies and services from eager small companies that will do anything (even lose money) to make a sale.

And what is my best advice for getting paid without the help of an expensive collection agent? If you can, show up at the customer's doorstep. Crafty deadbeats say it's easy to ignore collection letters, but much harder to brush off a friendly but determined face.

It's true; the best way to improve profitability is to stop unprofitable, time-consuming activities. You don't need an MBA to build a "big" and profitable enterprise either. All you need is a willingness to be selective in what you do, who you serve, and how fast you get paid. You can do it.

Susan Schreter About the author Susan Schreter is a Seattle-area investment banker and venture-funding expert serving startup entrepreneurs and fast-growth company executives. She also teaches business financing and entrepreneurship at business schools, angel forums, and microfinance organizations in the United States and internationally. Write to Susan at susan@takecommand.org .