On Bended Knee
Growing businesses have always had to be quick and nimble to compete in the big leagues. The concept of getting the sale now and adapting to fulfill the orders is practically ingrained in the entrepreneurial fast-growth mentality. But when times are tight, you have to be particularly careful about what customers you take on and under what terms. Winning a big client could either fulfill your dreams of steady income for the next six to 18 months and add a big name to your resume or bankrupt you faster than you can say "widget."
It all depends on how strategically you plan, experts say. Entrepreneurs tend to manage from the gut and fail to think institutionally, says Jeffrey Bolton, managing partner with accounting firm Daszkal Bolton LLP in Boca Raton, Florida. "So going into a deal, they don't do the legwork," he says. "They don't have the firepower internally to figure out what their bid should be and how to monitor the bid."
Before bidding on any project, make sure you do hard cash-flow projections and job costing, taking into account a host of factors. First up: "If the job is big enough, will [you] have the internal capacity to produce it without having to grow [your] company to handle that one contract?" says Bolton. Having to grow to support new business isn't necessarily a negative, he adds, but that client may take up a big part of your business. "And when the client knows that, they can squeeze you," he says.
If you do have to increase capacity or buy special equipment to service a large customer, get that cost covered upfront, advises Ray Silverstein of President's Resource Organization, a nationwide network of peer group forums for small-business owners. That means a long-term supply contract and an agreement that the client will buy the equipment if they cancel the contract within a certain period.
Next, set the payment schedule in stone so customers won't leave you in the lurch. "If they stretch out [payments], they can cripple you with cash-flow problems," says Silverstein. Even when they don't pay late, the amount a major customer owes you can be so significant, you simply can't afford the risk of taking the project without some payment upfront. "You have to determine the maximum amount of accounts receivable you're willing to have with an account, whether it's delinquent or not," advises Silverstein. If that amount is $100,000, for example, and the customer puts in an order for $175,000, then $75,000 needs to be paid upfront.
Price It Right
The other big danger for entrepreneurs is underpricing. "It's a widespread problem," says Norman Scarborough, associate professor of business at Presbyterian College in Clinton, South Carolina. "Entrepreneurs think customers are so price-sensitive that they always have to offer the lowest price, when, in reality, small companies have much more to offer because of their size"-such as personal attention, a customized approach and speed.
That's how Mike MacMillan, 47, president and founder of New York City-based MacMillan Communications, positions his company's PR services. "One of the advantages of being a smaller organization is that you're more efficient, so you have lower overhead," he says. Rather than charging less than competitors, he offers clients more bang for the buck. "We're able to put more of the budget directly into account work rather than overhead."
Of course, some businesses can't afford not to compete on price, particularly in manufacturing, where cost is a big factor. And often, small businesses will bid dangerously low in order to win business, only to find very little profit in the project. The key is to ask how important that business is to your future growth, whether you can cover the cost of the project, and whether it fits into your strategic plan even if you don't make money on it.
When he started his accounting firm in 1991, Bolton kept the income curve high throughout, but once he had work year-round, he began to selectively ask clients to pay more until he was profitable. But that strategy can be a challenge. "You can bury yourself in volume and enjoy the rush of getting the business," Bolton says. "If you're trying to build a reputation, that foot in the door is necessary, but you have to have an institutional mind-set, and not serve an institutional client with a mom-and-pop mind-set."
C.J. Prince is executive editor of CEO Magazine. She can be reached at email@example.com.