10 Steps to Avoid Going Out of Business
❏ Last week I spoke to Monthly Recurring Costs (MRC) Annual Review (Link). In this post, I will talk about the importance an often overlooked subject by business. It is the subject of how to follow 10 Steps to Avoid Going Out of Business. We’ve all seen companies close. If we frequented those businesses as a customer, we had a few ideas as to why it likely happened. Surprisingly, when one speaks to the owners, they blame everything and everyone but themselves. In reality, in almost 100% of the business closures, it was 100% the fault of the business owners. If any of you have had a company fail, are think you are about to, you’re going to challenge me on that statement. In this article, I’m going to prove my statement to be 100% true. At IdeaToGrowth.com (Link), we are here to help.
As the Founder and CEO of IdeaToGrowth.com (Link), my goal is to be there with the right kind of help at the right time for Executives. I write about many common business challenges businesses of all sizes will face. Executives who follow me and read my posts will find many answers to problems they are facing today. If you like my articles and need hands-on help, reach out to me.
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Step 1 – Create a Budget (& Live By It!)
Do you have a Business Plan with a Budget? If you are like most small to medium size businesses you do not. Yes, you may have put something together before you started your business, but when was the last time you looked at it? One year ago? Three years ago? Let’s admit it. You’re winging it.
A monthly budget, looking forward at least 12 months, can help you run your business. It can also help keep you from waking up one morning and realizing you can’t make the next payroll. Now you say “this can’t happen to me!”. Well, you are very wrong. Many businesses collect their monies each day, and it goes into their business bank account. They or their bookkeeper sits down once a month pay the business bills. For many businesses, there’s not much left over after paying the business bills, federal, state and local taxes. Each month you breathe a sigh of relief. Is this really how to want to run your business?
By creating a monthly budget and planning 12 months out, you can see what you need to do in sales and margin just to stay afloat. You need to put some money aside into a Reserve. Why? What happens if a big client who has been paying on time suddenly stops paying? What happens if that new line of products you decided to buy flop with your customers? If your #1 Salesperson quits and it takes you months to replace them, what will happen to your revenue? If your local economy goes into a downturn how long can you survive?
Do you have a marketing budget? How much? Many successful companies spend 3 – 15% of their revenue on marketing and advertising. What did you pay last year? Which brought in the most customers? Bottom line, you must have a Budget if you’re going to stay in business. If you don’t have s Budget now, time to sit down and make one. If you have a team, this should be a team project. Be sure to include your bookkeeper. They can tell you what you spent and where you made your money by product category. MAKE A BUDGET NOW!
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Step 2 – Form an Advisory Board (& Meet Monthly)
Do you have an Advisory Board? No? Time to create one! An advisory board is ideally made up of a combination of active and retired business professionals. Preferably, you have a retired CEO whose business was in the same space as yours. A financial professional, a CPA is ideal, is another person you should have. You should have a Customer Service expert who has 10+ years experience. Getting a Product Development Manager with experience in building similar products should be a target acquisition for your Advisory Board. The crucial last member is a Marketing professional familiar with products or services similar to yours.
Finding these skilled people will be a tall order for most companies. These people are hard to find and harder to attract. However, you must make it happen. You can buy them a nice lunch when you meet. Throw an annual Advisory Board Appreciation party! Consider paying them for their time. You can give them a small ownership stake in your company for each month they serve. I like the last one because they have a strong reason to not only show up but to participate and do follow up!
The next key component is you MUST meet once a month! Why? Both good and bad things tend to happen in a hurry. So many company leaders make a poor critical decision then a few months later the company is tanking, and they’re shocked at what happened. Discussing both your plan and results every 30 days can help avoid disasters. If you don’t have an Advisory Board, PLEASE FORM AN ADVISORY BOARD NOW!
Step 3 – Create a Customer Acquisition Plan
We’ve all seen it. A new business suddenly appears in a mall. You’ve never heard of them. What do they sell? Why should you buy from them? A few months later the business closes. Why? Likely they had No Customer Acquisition Plan. So you say you have a Customer Acquisition Plan? Really? Challenge questions:
- What is your CAC (Customer Acquisition Cost)?
- What are your top 5 methods of acquiring customers?
- How many dollars did you spend each month over the last twelve months on each method?
- Are you doing FaceBook advertising?
- LinkedIn advertising?
- Pinterest advertising?
- TV advertising?
- Podcast advertising?
- Google Adwords advertising?
- How do you market to get repeat customers?
- What is the monthly ratio of repeat customer to new customers for each of the last 12 months?
- How is your email marketing campaign working?
- Do you use door hangers?
- Have you tried billboard advertising?
How about marketing on movie theater screens? I’ve only scratched the surface on what you should be looking at in forming a Customer Acquisition Plan.
Step 4 – Don’t Be Your Customers ‘Bank’
When Michael Dell, Founder, and CEO of Dell Computer, started his business, he was a student in college. The timing was early in the life of the personal computer and about the only company that sold them was IBM. They were very expensive. The electronic components that made up a PC were commonly available through Taiwanese companies. How to build a PC from these parts was well known, but few if any were doing so. Michael Dell decided he would contract with a Taiwan company to buy and assemble most of the computer and ship the partial assemblies to him for final manufacture and shipment to customers.
But Michael had a problem. He had no money. So Michael cut a deal with the Taiwanese suppliers to pay them 60-90 days after they shipped to Michael. He then advertised through word of mouth initially and found his first customers. When they ordered, Michael quickly charged their card as soon as the products shipped. Because he collected his customers’ money BEFORE he had to pay his suppliers, he always had a positive cash flow balance!
The How do you get paid for your product or service? If you’re like most businesses, you buy the product you are going to sell from your supplier on 30-day payment terms. Therefore, you must pay your supplier 30 days AFTER they ship it to you. If you’re a small business with little credit history, you likely have to pay Cash for shipment. How long does it sit on your shelve before you sell it? Ten days? 30 days? 60 days? 90 days?
You are the opposite of Michael Dell. You have to raise the cash to fund your business. This type of money is usually costly. Likely you will pull it out of your savings. Alternately, you may borrow against your credit card or home (Yikes!). If you’re lucky you can get a business loan from a bank – but likely at a high-interest rate (Yikes Again!).
Be Like Michael Dell
I say, if possible, don’t be a bank! Be like Michael Dell. Reach out to suppliers who can give you 30, 60 or 90-day payment terms. Often its worth paying them a little bit more for the product if you can get longer terms. Let your suppliers be your Bank! If your business is a SaaS (Software as a Service) or Consulting type company, CHARGE BEFORE YOU DELIVER! For example, if you are going to do an Advertising Campaign for July, bill them in June specifying payment is due in full no later than June 20th. That give you ten days to reach out to them if they haven’t paid and to fill that time slot with another waiting client if they don’t. When they don’t pay, you don’t work.
When you do your Customer Acquisition Plan correctly, you pop in the next waiting client into their slot. If your fees are under $5K, require your clients to pay by credit card. When you are a services business, charge their card ten days before their appointment. Just be sure to specify that you will do that in your Terms of Service. Most consulting or services type business it takes days or weeks to fill a time slot. Once a client has booked a time slot, it’s usually impossible for you to fill it with another paying customer quickly. If a client cancels or doesn’t show, don’t make it your financial problem. If you can fill the slot with another client, integrity says you should refund their money and let them know why.
Bottom line – If possible, Don’t Be a Bank to Your Customers.
Step 5 – Survey Your Customers Satisfaction
What is your customer’s opinion of your business? If you said “They love us” or anything similar, why do you think that? Is your business growing 10%+ per month every month? No? Then your customers likely don’t love you as much as you might think!
I propose you need to find out the “Why” or “Why Not” to this question. If you are a business today, online or brick and mortar, you should have a process by which you are collecting all of your customers’ email addresses. If not – START TODAY!
You need to do a Customer Satisfaction Survey. What I am going to recommend will ideally involve your website guru. Although I understand that this may not be possible, so you can do the same thing with a postcard or even a postcard-sized handout.
At the top of this website, email, postcard or handout, write “Customer Satisfaction Survey.”. Under that write “Thank you for your business! At [Insert Business Name] we would like to know the Top 3 Reasons, you honor us with your business!”. Please check UP TO 3 REASONS BELOW. Thank you in advance for helping us learn how to serve you better!“.
Now write down the nine reason “you” think your customers buy from you. Add a tenth that is titled “Other” with a lined space that allows the user to insert a few words. I’ve shown an example list below.
If you want to increase your conversion rate (the number of people who will fill out the form), add a Reward to the bottom. Keep it simple. It can be a 10% off your next purchase of $100 or more. It can be that for every 100 people that complete the survey you will make a $100 donation to a local charity. Pick something that will have some “value” to your customers. I like the local charity angle for increased conversion. It sets you up for a followup email a month or so later showing a snapshot of your check to the local charity. Example:
For every ten people who complete the survey, [Your Company Name] will donate $10 to [Insert Local Charity Name]. Thank you for your feedback and for helping one of our local charities! [Your Signature], CEO
Now you have the “real” top 3 reasons your customers buy from you. There’s a pretty good chance your “Why’s” were not your customers Why’s. Ideally, all nine of the reasons you listed are important to growing your business. Now you know where you need to focus “getting better” at those things on your list that you need to improve on. The number ten blank may even open your eyes to something relevant to your customers that you didn’t even realize. Now that you know to take advantage of that and promote it. Bottom line – you are no longer guessing why your customers buy from you. Not guessing is critical if you want to keep growing your business as fast as possible.
Thank you for your business! At [Insert Business Name] we would like to know the Top 3 Reasons that you honor us with your business!”.
Please check UP TO 3 REASONS BELOW. Thank you in advance for helping us learn how to serve you better!
[ ] Competitive Prices [ ] Customer Service
[ ] Product Warranty [ ] Easy Access Location
[ ] Product Quality [ ] Ease of Website Use
[ ] Product Selection [ ] Knowledge of Staff
[ ] You Make Me Money [ ] Other: _______________________________________
For every 10 people who complete the survey, [Your Company Name] will donate $10 to [Insert Local Charity Name].
Thank you for your feedback and for helping one of our local charities!
[Your Signature], CEO
Step 6 – Raise Prices
I am a firm believer in providing a quality product and service at a competitive price. Notice I did not say the lowest price. Why not? There is no brand loyalty to a vendor who sells cheap stuff. As soon as someone cheaper comes along your customer will jump ship and sail away with them! I prefer to be the Apple and not the Google (cellular phone reference). I want my customers to have a substantial laundry list of reasons they buy from me. High-quality products, service, support and more! I want clients thinking about how what I provide solve a big problem that makes them more money (in actual quantifiable cash or quality of life). When they are referring my company to another business person, I only want my clients to speak to the “value” I bring them.
I work with a significant number of startups each year and almost without exception, they “under-price” their product or service. The first thing I tell them is “Raise Your Prices Immediately!”. If your company is a services business, start today with higher rates to all new clients. Phase in higher prices over 3-12 months. If you’re just starting your business, discounting to your early customers is common. When you invoice, show your future rate on the invoice, then add a discount line, then the amount they are paying today. Only offer discounts small windows of time such as two week, one month, three months. Avoid giving a discount for more than six months, even if you are a new company. More extended periods cause customers to look at what they are paying the regular price, and it’s hard to raise prices on them in the future.
If you raise your prices once and you lose few to no customers at the new higher rate, raise them again! You are most likely still selling at too low of a price. Don’t leave money on the table like this. If you are giving more value to your customers than you are charging them, they know it.
Step 7 – Offer a Free Sample or Trial
I’ve seen many companies come to market with a product and try to sell it at full price. In hard physical products, this is common and necessary. But the more expensive it is, the more reluctant a buyer is going to be to shell out hard cash without “seeing if it solves the problem.” In hard goods, you need to get “experts” to write up reviews on your product. Even in software, you should do the same. However, in the software arena, you have more options than hard goods. You can offer a Free Trial!
When buying your product or service, customers are doing so solely to “solve a problem.” Vendors need to build a sense of trust that your product or service is going to solve that problem. No one wants to buy a product or service, then find out that it doesn’t address their problem! With software, one of the easiest ways to build trust and prove that you are the solution is to offer a free use trial period. By allowing a potential customer to try before they buy, you are removing the rip-off fear factor and building trust! If your potential customer infrequently uses the software, you will want to disable a key feature or two, so they pay before the problem is solved. If your software is going to be used daily and is complicated, you may need a more extended free evaluation period. Build trust, then sell!
Step 8 – Keep Your Bank & Investors Up to Date
Few Entrepreneurs want to be the “bearer of bad news” to either our investors or staff. Many smaller companies do not have a formal board, or if they do, have only meeting quarterly. Neither banks or investors like surprises. If your sales are falling below forecast, discuss this in detail in your monthly advisory meeting. When your financials are going south quickly between sessions, schedule a conference call to discuss the best course of action. If you have a bank loan and if the downward sales trend is going to impact your ability to make your monthly payment within a month or two, get advice from your board and CPA as to when you should have a sit down to discuss the issues.
Many banks are willing to work with a customer to lower payments for a time if you don’t surprise them. Too many entrepreneurs miss a bank payment and wait for the bank to start chasing them. Investors are more likely to respond with help if you’ve given them an early heads up on financial challenges. It’s better if you call your banks up and say “We’re out of money. Send more tomorrow, or we’re closing our doors.” You laugh, but it happens more often than you think. Please, never be this type of borrower! It puts you on the wrong side of asking for help when you need it.
Step 9 – Write a Monthly Newsletter
My clients will tell you that I am a firm believer in every company writing a one-page Monthly Newsletter that they share with the world! Newsletters do so much for a firm. One, it forces you to once a month assess the company’s’ overall status. Two, it brings the critical leadership together, CEO – Sales & Marketing – Product Development – HR, to each write one overview paragraph promoting both their progress and challenges. Three, a newsletter is a perfect medium to share monthly with investors, potential investors, customers, potential customers, suppliers, potential suppliers, employee, potential employees, news media and even your competitors. Plus it can be a great way to grow your mailing list. There is nothing but upside.
I advise that you publish your newsletter on the 1st calendar day of every month, regardless of the day of the week. It’s also OK to shift that 1st day of the month to the firsts business day if the 1st falls on a Saturday or Sunday so that it is more likely to be read. The critical point is that by picking the 1st of every month, those with interest will quickly form a habit of looking for your monthly newsletter. No other day of the month has this same habit-forming value. I promise you that within 2-3 months you will see multiple positive effects across all of your engagements.
Step 10 – Think Outside the Box
Tying to Avoid Going Out of Business? I challenge you to think outside the box on all aspects of your business!
As CEO in my last VC company, I had the challenge of getting noticed by investors and potential employees. Being in Silicon Valley, I had to “think outside the box” to rise above the noise. I had the inspiration to buy up 60-second ad space on the pre-roll (those ads you see before a movie) on every theater in Silicon Valley. Within weeks more engineers were taking our calls to speak about job opportunities than ever before. At investor parties, people who I did not know would approach me and say “I saw your ad at the movie theater with my kids. Please tell me more about your company.” The ads cost me a few thousand dollars a month. My team and I raised 87mm dollars over three investment rounds. Movie theater ads were obviously not why investors wrote checks, but it did get us noticed.
I hope 10 Steps to Avoid Going Out of Business has provided educational value to you. Before my coaching on this subject, few of my clients were following these Best Practices. I hope you will take my advice to heart. If you follow these ten steps early and consistently, you’re much less likely to get into trouble.
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