Last month, I provided the heart breaking stats on the survival rate of small businesses. As a fairly new business start-up, we faced and continue to face similar challenges. As we mark our 5th year in business, I want to highlight the top 5 challenges we faced in our business and some of the steps we’ve taken or currently taking to address these challenges. These are real life challenges we faced over the last 5 years and we’re sharing our insights from our experience with you so you can learn from them and where applicable, apply to your own business. Our goal as always is to see you succeed.
Here are the top five challenges we will be diving into over the next couple of months:
- Cash flow issues/Undercapitalization of your business
- No investment in a proven pipeline for new business
- Shallow dialogue with our clients
- Lack of differentiation in the market place
- Fear or reluctance to take risks or try new things
Today, we will focus on cash flow issues and undercapitalization of your business. If you run a business you will agree that cash is critical to keeping your doors open. As they often say, cash is king! On the surface, it would appear that most businesses fail because they run out of cash. However, often times, this is not the primary reason for failure. Lack of cash is a symptom of other foundational aspects of the business that has been neglected, such as items 2 to 5 in the list above.
For us, we run a knowledge-based business so initial capital required to start our firm was not significant. Our major expenses when we started were rent, office furniture and computer equipment, professional practice insurance, software licensing and fees, professional development, advertisement and later, employee costs when we hired additional help. As a new business with very few clients, we had a lot more expenses than income and quickly depleted the initial capital invested by the Partners. So early on, we had to deal with cash flow challenges which did not get better even as we got new clients. We had to rely on overdraft from the bank to sustain the business. Today, we still keep a close eye on our cash flow and we continue to rely on our bank to fund shortfalls as we invest more and more capital in the business.
Here are some of the key insights we learned from our experience dealing with cash flow issues and capitalization concerns in running our business as well as what we did or currently doing to deal with this:
- Low gross margin: Over the years, with close analysis of our margins we realized that the low margins on our sales was a critical contributor to lack of sufficient cash flow in the business. This was primarily due to the low fees we charged early on in the business. To this day, we still under charge in some cases. One reason for this is the lack of differentiation in the market place (Challenge # 4) that left us competing with all the other Accountants or Tax Preparers in the market place. The key to dealing with this is investing in ways to differentiate our services and offerings from the rest of the market. We are seriously working on this and have started making significant changes in certain aspects of our service delivery. If we are able to offer more value to our clients, we can charge higher fees for the value we provide, value that clients cannot get from our competitors.
- Slow-paying invoices: At some point, this was a big concern as we had thousands of dollars in receivables that were 30 days, 60 days and sometimes 90 days past due. The impact on cash flow can be significant when invoices are not paid on time. For some understandable reasons we were shy to ask our clients to pay. Our clients are busy professionals and business owners, so most often they simply forget. It is our responsibility to remind them. So we’ve implemented a few things like requiring upfront payment of a certain percentage of the total fees prior to commencing the engagement; invoicing more timely; following up more frequently on unpaid invoices. Other ideas we are now considering include offering early payment discounts; implementing monthly or quarterly recurring pre-authorized payments; and automating the process to remind clients of unpaid invoices.
- High overhead expenses: Every business will have overhead expenses that must be managed closely. The overhead expenses impacted our cash flows and we found it challenging to cut in this area. What we did was to look for cheaper ways to pay for the key things we needed. For example, we cut our radio advertisement which was expensive and spent a fraction of that money in events and online marketing. When it comes to marketing, the key is your ability to measure the results of your marketing effort as this will provide insights on where you should spend. This is an area we are currently exploring.
- Bad debt: If you’re in a business like ours, you will likely deal with bad debt. While the impact on our cash flows is less for this issue compared to the others, we have had our share of bad debts. These are clients who just don’t pay part or the entire invoice. Requiring upfront payment has minimized this and implementing a more robust client engagement process is something we are refining to help substantially reduce the likelihood of bad debt.
- Slow investment or capitalization of the business: A growing business requires capitalization to fuel that growth. You can capitalize one of two ways – reinvest your profits into the business or add debt to the business by borrowing. In running our business, we’ve used both options but to a limited degree. Although our business has grown over the last 5 years, the growth has been slow, principally because we’ve not been aggressive in throwing more capital to fuel growth. We’re now at a place in our business where we feel comfortable increasing the capitalization of the business a little bit more aggressively than we’ve done in the past. We continue to minimize owners’ draw from the business so we can leave the capital to invest in growth. In fact, our employees earn more than we do even after five years in business. The key here is to have a long-term view of your business that will enable you invest more in the capitalization of the business.
Hopefully, there are a few points from this that you can use to improve your business performance. Next month we will look into another core area of running your business – building a proven pipeline for generating new business. Stay tuned!
1 comment. Leave new
Very well articulated. Thanks for sharing