Set Profit Margin Goals

In this episode of the television show we take you inside Flap Happy, a California business that is making children’s hats for Talbots, Nordstrom, Children’s Wear Digest and dozens of others. Now they make hundreds of items for specialty small children’s wear retailers all around the world.

Key Questions:

Q: How do I increase profits?
A: Don’t assume that all sales are equal.

Laurie’s customers are basically retailers. She has some direct sales from her catalog, but, this is a very small percentage of her business. Retailers are not all equal. She started her business with the specialty shops and today she could sell to the mass merchandisers such as Wal-Mart or Costco, but, if she does that, her profits will erode because they want to buy at such reduced prices her margins evaporate.

She could find a way to make the products for less, but, she is committed to the quality she achieves by keeping the entire production process in the U.S. If she let the manufacturing go off-shore, she is convinced that the quality would drop and competitive pressures on her shops would be too great. If that quality drops with the prices required for mass distribution, her specialty shops will stop ordering products.

Rather than put these relationships in danger, she has decided not sell through mass merchandisers.

Q: What is one business process Laurie does better than others because she does it different?
A: Collections. Most manufacturers won’t ship to a shop owner who has bad credit, but, Laurie finds ways to do business with people who have bad credit. She gets them to pay with a credit card; she holds checks; she ships C.O.D. Her sister works closely with all of the questionable accounts and collections are made. Laurie is making sales to retailers others refuse to work with. Everyone wins because the shop owner gets Laurie’s unique high qualtiy products; Laurie gets distribution; and the kids get the great hats and clothing.

Laurie is also creative when it comes to collecting from her big customers. Early on in her relation with them, she was able to get a 50% advance payment from a big customer . This upfront cash is critical to her ability to get the product manufactured.. Customers want you to succeed and will work with you if you demonstrate your good faith by achieving deadlines. Also, notice that Laurie only used her credit card to finance short term production costs and she fully anticipated not carrying that debt beyond 30 days. Never carry credit card debt. Period. No further discussion.

Managing cash flow from operations is important. Any amount of cash will go further if you can get cash into the company quicker and postpone disbursing funds from the business.

Q: How does a small business owner manage cash flow from operations to his or her advantage?
A: In addition to the money you put into the business, debt financing and equity financing, there’s cash flow from operations. Primarily, this consists of cash receipts from sales, generally the collection of receivables, and cash disbursements related to inventory and other accounts payable purchases and, of course, payroll. Let’s look at cash management strategies for each of these:

Cash Receipts from Sales

If you are not in a business where your customers pay cash for goods and/or services received, then you will have accounts receivable. The sooner your customers pay their bills, the better your cash flow. To encourage them to pay promptly:

  • Collect advance deposits on sales if possible.
  • Get your invoices in the mail quickly, preferably delivered with the goods and/or services.
  • Offer a small discount to customers who pay the invoice substantially before it’s due. Put this clearly on your invoice, e.g., “2 10, Net 30″ means the customer can take a 2% discount if (s)he pays in 10 days, otherwise payment is due in 30 days.
  • Charge interest on amounts not paid on time, i.e., according to the terms of the invoice. Prominently display the interest rate and terms on your invoice.
  • Call each customer on THE day that his or her invoice is past due.
  • Mail monthly statements summarizing outstanding invoices. Most accounting software packages used today have this capability. Most importantly, minimize your bad debts.
  • Get credit references and do credit checks on all new customers. Monitor your accounts receivable aging daily and stop shipping or serving problem accounts until collection issues are resolved.

Inventory Purchases and Other Accounts Payable Items
Here, our strategy shifts. While we do everything we can to accelerate the flow of cash into our businesses, once it is there, we do all we can to hold onto it as long as possible. Don’t cross the line of affecting your credit rating or vendor relationships, but walk right up to it. Here are some specific things you can do:

Practice JIT Inventory Control
JIT stands for “just in time”. Order what you need to be available when you need it, but don’t stockpile goods. Inventory investments tie up MOM.
Ask your vendors for extended terms. Tell him you are starting a new business and you could build it up faster if you could match your payments to the vendor with your collections from your customers. Take the time to explain your business to your vendor and then ask for terms of 30 days more than your normal collection cycle. In other words, if most of your customers pay in 45 days, then ask for 75 days. Remember, your vendors are like you, they are looking for new quality customers. And who can better sell the idea of your business’ promise than you?

Deposit your funds locally and then arrange to have them transferred at the end of each day to an out-of-town bank. Write your checks on the out-of-town bank. This usually gains you about three days of “float” where the vendor records your payment before the funds are actually available to him or her. Writing a check without the funds to back it up is against the law and we are certainly not advocating anything illegal but good cash management systems take advantage of the float.

If you are one of those rare small businesses who have started your business with employees, you have special considerations.

Meeting payroll is one of the biggest responsibilities and expenses of most businesses. You do have to pay your people and you certainly have to deposit your payroll taxes on time. Still, there are some cash management opportunities here.

Outside payroll services and staff leasing companies provide a wonderful service to small businesses. In addition to handling all the required filings, they offer the opportunity to procure certain employee benefits, such as workmen’s compensation insurance, at reduced rates since you are purchasing as part of a large pool. But these services may be a luxury you cannot afford in the early years. In addition to the cost of the service, because the payroll service company is writing the paychecks for your employees on their account, they’ll require that you fund that account several days in advance to ensure the funds are available as they process the payroll. They also draft the payroll taxes from your bank account, including the employer portion of social security, as the payroll as processed.

In fact, you are required to remit payroll taxes, those withheld from your employees and the portion the employer pays, at varying times based on the size of your payroll. The smaller the company, the more the deposit can be delayed. You can research the statutory requirements in your State on the Internet. The point we are making here is there are cash management opportunities in processing your own payroll.

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