by MHolland | Jan 31, 2024 | Business Tips, Cash Flow
Accountants should not be responsible for setting pricing.
Why not, you ask?
Because most accountants will focus on all your costs (inputs) and add an acceptable mark-up to get to the price.
Here is the problem – customers do not care what your costs are. Why should they? You could be running a very inefficient business with wages that are too high, rent that is too high, and so on.
Costs Do Not Equal Value
Let us look at a car example. It likely costs more to build a Mercedes than a Ford Fusion. Yet, not that much more. In other words, the mark-up on the Mercedes is greater than on the Ford Fusion for the intangible value that the customer places on that 3-star symbol on the hood.
In today’s outsourced manufacturing environment how does a business add value in unique ways to get a higher price?
It seems like everything is a commodity these days. How do you do value pricing when you are selling a commodity?
See It Through the Eyes of Your Customer
This is where, again, you must look at your product/service through the eyes of your customer.
Ask these questions:
- What elements of your product/service does your customer value?
- For example, can you deliver the commodity you sell more quickly than your competitors?
- What about after-market service? When the commodity product breaks down, what does your customer do? What expectations do they have? You could offer awesome after-market service for a price. You could build it into the initial pricing.
- What is a frustration that ALL customers have in your industry? It could be delivery times. No after-market service. Slow service. Indifferent, non-caring attitudes from order takers. Solve this big problem everyone has, and you are now differentiated. You will stand out from the crowd.
- What can be bundled with your “commodity” to add value and create something unique?
An Example of Fixing an Industry Wide Problem
In the accounting industry almost, everyone charges by the hour.
So, the client never knows what the ultimate bill will be until the work is done. All the risk is borne by the customer.
Most clients hate hourly billing. They hate it because they never know what they will pay.
This is where Fixed Pricing comes in. You work out what the value is to the client for the work to be performed and then set that price. You get the client to sign that agreement. The client will then hold you accountable for the results that you are committed to deliver.
All the risk is borne by the seller now. If you are inefficient, you will make less profit. Conversely, the rewards are all with you as the seller now too. If you take less time to fulfill on the promised results, then you will have more profit. (The client does not care; they agree to a Fixed Price and the inputs are not relevant).
Fixed Price Agreements transform something that most clients find annoying, irritating, or downright unfair into a competitive advantage.
How To Turn a Commodity into a Rarity
Again, let us again use the accounting industry as an example…
A tax return could be seen as a commodity now. It is just entering your slips into a tax software program, and the result is spit out and you either pay tax or get a refund. End of story.
The cheaper the tax return the more you save.
Why would you pay more? Where is the value add?
Okay, this is where bundling can come in handy.
You look at all the services you offer as an accounting firm – wealth planning, and retirement planning as two examples.
You create a bundle of services that includes:
- Retirement planning
- Guaranteed tax return. If the IRS or CRA sends any correspondence to you regarding your tax return that year you will handle it free of charge. In other words, audit insurance.
- You provide free phone calls on any tax matter coming up during the year.
As an example, let us imagine that the tax return is only worth $75. However, the entire bundle mentioned above is worth $1,000. Not all the clients of the firm will pay that. Many will, and the profitability could be much, much higher.
The above example could apply to most professional service firms, and even blue-collar industries like electricity and plumbing.
For example, a plumber could charge a fixed maintenance fee to cover a set of deliverables including annual maintenance that many people would happily pay extra for.
In Closing
Think about, in your industry, a problem that everyone has with your industry. (You may need to ask your customers). Solve that problem and change your prices accordingly.
Lastly, think of how you can use the concept of bundling to add value and increase your pricing for a bundle. Insurance or guarantees are a great way to add value.
Thanks for reading…
by MHolland | Jan 13, 2021 | Cash Flow
Last week I wrote about the early yardage predictor of cash-flow.
Do you remember? It is the estimated dollar figure of what is in your sales pipeline. And there is the timing aspect. This is the time it takes from connecting with a prospect to closing a sale.
This week we will look at what I call the back-end timing.
Now we look to the future. We look at one grand Key Performance Indicator. It is made up of 3 parts.
Let us take a look at…
What is Your Cash Conversion Cycle?
In a perfect business you have no accounts receivable, no inventory, and you pay your vendors later!
This translates to – you make a sale, and the cash goes into your bank right away.
Imagine you pay your suppliers in 30 days. Wow! Perfect, right? You get the money right away and pay your vendors later.
For most businesses, this is not how it works.
Why not?
Because for most businesses, you have accounts receivable, inventory to sell and accounts payable to pay.
Most businesses have money tied up in accounts receivable (money owed to you). Then there is a lot of cash invested in inventory for others.
The third number is favorable to you – paying your vendors later helps preserve cash!
Let us take a look now at what makes up the calculation of your cash conversion cycle…
Cash Conversion is Made Up of 3 Numbers
Three things make up your cash conversion cycle:
- The days on average it takes to collect your accounts receivable, plus,
- The days on average it takes to sell your inventory
- Less the days on average you take to pay vendors
Let us say it takes you an average of 27 days to collect your accounts receivable (amounts owed to you).
It also takes an average of 18 days to sell your inventory on hand.
You take 21 days to pay your vendors.
Your cash conversion cycle is simply the sum of the first two numbers less the 3rd number.
In this example, you add 27 days to 18 days, and you get 45 days. You subtract 21 days that you take to pay your vendors for the final number of 24 days.
Your cash conversion cycle is 24 days.
This is an estimated number and not a hard number. Each number is an average and it is based on the past.
Anything changes and boom, so does the number.
What Should Your Goal Be?
The trick to improve your cash conversion cycle is to get paid quicker from your customers, sell your stock on hand faster, and pay your vendors a bit more slowly.
Here is an interesting question…
Can you ever have a negative cash conversion cycle?
Yes!
Here, “negative” is great!
For instance, you get paid upfront for most sales, so your Days Receivable is just 3 days. You turn your inventory over super fast in 9 days. You pay your suppliers in 21 days.
So, let us do the math. Three plus nine equals twelve. Twelve minus twenty-one equals what? Negative 9.
This would be a ridiculously awesome business to have, provided it is profitable. It would always be cash-flow positive!
Thanks for reading…
by MHolland | Jan 6, 2021 | Cash Flow
Timing.
And timing has two aspects to it.
The first is the timing of the prospects in your pipeline.
What is the best early indicator of your cash? The value of the interested prospects in your sales pipeline. I will show you how to get that figure.
Firstly, we will look at the numbers.
Number 1 – Possible Prospects in Your Pipeline
At the top of your pipeline are all the possible customers/clients.
This number shifts based on economics. For instance, imagine you own a restaurant. The number of potential customers eating out – in a pandemic – goes down. (And you can seat way less too).
However, the number of people eating at home (and not traveling) goes up!
You need to pivot fast. You must get home deliveries going. Then find creative ways to market to these “eating at home” customers.
The first number are the total possible clients in your area, for your business.
What is next?
Number 2 – The Number of Actual Prospects in Your Pipeline
Now you need a hard number. Who have you been in contact with?
This could be number of prospects reached through social media, direct mail, print advertising, and radio as examples.
This number is the top of your funnel.
We will go through an example…
You own a technology business. To reach a prospect you decide to run an email campaign.
Next, and this is critically important. You need to define and refine your Number 1 above – the number of potential clients for you.
Perhaps everyone could use some aspect of your technology services. That number is too big. You realize you have expertise in, say, non-profits and charities.
Great! Now get more specific. You want the ones of a certain size. It could be based on sales, or in this case, total revenue from donations. Or it could be employee size.
You buy a list of all organizations in your targeted niche from a company like InfoCanada.
Now you start connecting, and connecting, and connecting.
You see, you have to find out how many contact points it will take, on average before one of two things happen. (1) you reach a natural dead-end, or (2) you obtain a new client.
In other words, how many emails – three, maybe four – followed up with a phone call before you stop or convert.
Which leads to the third number…
Number 3 – Your Conversion Rate
How many people in your pipeline are pondering becoming your client?
There are actually two conversion rates here. The first is – the percentage of prospects who went from a name on a list to actually engaging with you.
The final conversion rate is the percentage of clients looking who become clients.
I will show you how this works:
Conversion rate #1
- Number of names purchased to email to – 1,000
- Number of prospects who looked at your offering – 300
Conversion rate number one – 30% (300/1,000)
Conversion rate #2
- Number of prospects who looked at your offering – 300
- Number of prospects who sign up – 50
Conversion rate number two – 17% (50/300)
Each tells a different story. Number 1 tells you how effective you are reaching the right audience. Number two tells you how good you are at converting an interested prospect to a paying client.
As in Comedy, Timing is Everything
Knowing the length of time, it takes for a name on a list to become a client is critical.
With it you can calculate the value of your sales pipeline at any point in time.
This is known as your sales cycle timing. It varies from industry to industry. A general rule of thumb is that the higher the value of what you are selling, the longer the sales cycle. It can even be years in some cases.
Before you get to the final number, you must know one more number. Your average sale!
Now you can create a cash-flow forecast with that solid dollar value of projected sales. You multiple the average dollar value of a sale, by the expected number of clients. You place that dollar value into the future month based on your average sales cycle.
Then you test, measure and tweak.
In Summary
Next week, I will write about the second aspect that affects your cash-flow timing.
Thanks for reading…
by MHolland | May 13, 2020 | Cash Flow
We are in the midst of a global liquidity shock.
What is that? It goes like this. Business A is not getting paid. To preserve cash they stop paying their payables.
Business B is Business A’s supplier. Business A’s account payable is Business B’s “accounts receivable”.
Business B, in turn, tells its suppliers that “no one is paying us!”. So, we cannot pay you. Ouch.
Business C (customer of Business B) says the same thing to its suppliers…
…and so on, and so on, and so on…
It is a Global Liquidity Shock.
To manage your cash-flow you must know three things it is made up of.
First Thing – Cash-Flow From Operations
You sell stuff. You have expenses. The difference is your net profit. So far so obvious…
Imagine you sold only for cash. You paid for things only with cash. Your net profit would equal your operational cash-flow.
That is not what happens though is it?
People do not all pay cash. You do not pay all expenses with cash.
Accounts receivable will become cash when collected. Inventory becomes cash when sold.
Accounts payable and other things you owe will use cash later on.
The first section of your Cash-Flow statement is called Operational Cash-Flow.
You begin with “Net Profit”.
Did “accounts receivable” go up from last month? Subtract the difference from net profit. You have not received that money yet.
Did “inventory” go down from last month? Add the difference to your net profit. You sold stuff.
Have your accounts payable gone up? You have not paid all your bills. Add the difference to your net profit.
Rule # 1 : every current asset that goes up you subtract that from your net profit. Every current asset that went down you add that to your net profit.
Rule # 2 : every current liability that went up you add that to net profit. Every current liability that went down you subtract that from net profit.
Rule 2 is the exact opposite of Rule 1.
Here is a sample Operational Cash-Flow:
| Net profit |
$6,000 |
| Accounts receivable went up |
(600)* |
| Inventory went down |
900* |
| Accounts payable went up |
3,000** |
| Operational cash-flow |
$9,300 |
|
|
*see Rule #1
**see Rule #2
Part 2 – Investing Activities
There are other things that affect cash-flow that are long-term. Buying fixed assets is one example.
You take the Operational Cash-Flow as above. And deduct the investment in long-term things like fixed assets.
It looks like this:
| Operational cash-flow |
$9,300 |
| Purchase of equipment |
(6,000) |
| Loaned money to another company |
(3,000) |
| Cash-flow before financing activities |
$300 |
Part 3 – Financing Activities
Now, you take your Cash-Flow before Financing activities as above. You add or subtract things like long-term loans and shareholder dividends.
These include long-term loans and dividend payments to shareholders.
You start with your cash-flow before financing activities as above:
| Cash-flow before financing activities |
$300 |
| Long-term loan from bank* |
6,000 |
| Dividends to shareholder |
(2,100) |
| Cash-flow before financing activities |
$4,200 |
*you financed the equipment above assets
3 Cash-Flow Tips
- Push hard (with kindness) on accounts receivable collections. Use software to chase outstanding invoices. Make calls. Document everything.
- Extend payments on accounts payable. Work out payment terms with your suppliers.
- Finance equipment with long-term loans.
Thanks for reading…(if you need help, private message me)
