Remember the Billy Crystal movie City Slickers? Curly, played by Jack Palance, famously challenged Crystal’s character, Mitch, to find “the one thing” that would lead to success and happiness.
Well, in these tight economic times, it’s more like three things — three critical areas that every business owner should be considering:
How much profit your 10 biggest customers generate. The profit you make on these key customers determines in large part your company’s overall profitability. And, your largest customers aren’t necessarily your most profitable. Typically, your top customers get some kind of special concessions — concessions that ultimately impact you in terms of time and/or money. For example, you may extend special payment terms, provide expedited delivery or offer extended customer service. You may even drop minimum order requirements and accept smaller orders than you really want to. Each of these concessions is a cost. Bottom line: You need to know how profitable these accounts are in order to make informed decisions about your business.
How much each product you sell really costs. It’s hard to “make it up on volume” if you’re losing money on every product or service you’re selling. In fact, your most popular item could be a loss leader without you even knowing it if that product requires a disproportionate amount of overhead costs. Here, you can’t determine your all-important gross profit simply by subtracting direct costs of manufacture or purchase from the selling price. You have to figure indirect costs, too — everything from receiving and warehousing to the overhead of running the plant and manning your operations. Avoid the temptation to calculate an average for an entire department or product line instead of for the individual product itself.
How quickly you collect what you’re owed. Cash is king in a down economy. So you might need to retool your accounts receivable collection processes in light of the economic climate. At the very least, you’ll want to be sure that at 30, 60 and 90 days, you have processes in place to contact clients and prompt them for payment. Age your firm’s accounts receivable once a week (i.e., classify outstanding balances according to client and original billing date). Unlike wine, accounts receivable don’t get better with age. Studies reveal that the likelihood of collecting receivables drops drastically as time goes on: from over 90 percent after 30 days to 74 percent after 90 days and just 50 percent after six months.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.