If you are having cash flow issues, it may likely be that you are not pricing your jobs right. But how do you change your pricing strategy during financial uncertainty without pushback from your clients?
Stephen King, GrowthForce President and CEO, recently joined Spencer Shaw on The Business Growth Podcast, to talk about the simple steps to get your financials in order, and how to increase prices in a way that customers better understand the value.
Pricing is the most challenging decision a business owner will make– especially during financial uncertainties.
Stephen and Spencer discuss the importance of getting the right data at your fingertips. “Knowing the numbers in your business is absolutely essential.” Spencer says, “When you don't know your numbers, you don't realize the profit margins you have. And once you do realize it, that's when you need to start raising your prices. It actually shows your clients how you're going to provide more value to them. It's a complete win-win.”
The Lifeblood Of Every Business
There are three reasons businesses fail: cash flow, cash flow, and cash flow.
But first take a step back and make sure your focus isn’t distorted. “It starts with getting the right mindset. People's relationship with money screws up their business. You have to have a feeling of abundance and find a reason to be grateful.” Stephen shares.
The first step is to paint a picture of reality by doing a cash flow forecast.
Click here for a simple Cash Flow Forecasting tool in excel– Designed to help you see the sources and uses of funds over 13 weeks. “We're recommending 13 weeks because it's going to take time before we really know what the economy will look like, especially when the PPP funding starts to run out.” Stephen explains.
A forecast will bring peace and clarity into the right mindset.
“Most of the time I’m having conversations with business owners that have profits but no cash flow, saying, I made a million dollars last year, where did it go?’” Stephen adds.
Starting with Collections
Don't let your clients' cash flow problems become your cash flow problems.
Collections are often the last thing anyone wants to do- especially in a time of a financial crisis. However, outstanding balances can seriously impact your cash flow and hold your business back.
By improving billing processes and adopting collections best practices for your business, you can improve the likelihood that you will get paid on time or in advance (yes, it really can happen!).
We recommend following the three F's of Collections and automating the process as much as you can.
The 3 F's of Collections...
Firm: Never end a call without a confirmed date.
Focused: Overcome objectives and be prepared with answers.
Friendly: Kindness goes a long way.
game changer: automation
The future of A/R collections lie in the hands of automation.
“I was an Inc. 500 featured speaker for a couple of years, and we did some research on the best practices in the fortune 1000 cash management. We did the math to show how big of a difference it is to bill weekly vs. monthly, or as soon as the job is done.” Stephen explains, “The secret is to get paid before you have to pay payroll. That timing makes a really big difference, then you want to automate the whole process.”
Stephen adds “The AICPA predicted that the bookkeeping function will be gone by 2023, completely automated from technology that already exists today and COVID has accelerated."
Intuit payment solutions allows you to be able to automate the entire process.
We also suggest automating collections. If you use QuickBooks® Online you can integrate the Funding Gates™ app, a receivable management system, to automate your collection process. GrowthForce uses Funding Gates to set up automatic collections reminders according to our collection policy.
And when someone is late, it will automatically send a series of progressively direct emails and make phone calls to get your money. Start at the largest balances that will impact your cash flow forecast the most.
Stephen adds, “We found that implementing this helps lower your day sales outstanding– number of days it takes you to collect on your bill– from 30 to 14.”
The other part of cash flow is the spending side. “Make sure your bookkeeper has a pay slowly rule and not a clean desk rule. We recommend bill.com because it allows you to be able to reduce your bookkeeping costs for bill payment by around 87%.”
The Wall Street Journal estimated that the average small business spends $12 to pay a bill. By using Bill.com to pay bills electronically, the cost to pay a bill can be slashed to around $1.50.
Bridging the Gap Between Manual procedures & Automation
Spencer asks “What are you seeing with business owners that are coming from the old world of taking forever to do their bookkeeping and accounting and not having automated processes to now doing it. How are they bridging that gap quickly?”
The answer: Raging Incrementalism.
“We call it raging incrementalism,” Stephen continues, “Every month you get a little bit better, a little bit smarter. It starts with the chart of the accounts and your business’s above the line costs versus your below line costs?”
Most businesses have cash flow problems because of their pricing.
Stephen adds, “They're not pricing their jobs enough to generate profit margin that will contribute to pay for the overhead and to contribute to profits”
The Emotional Piece Of Value Pricing: “I’m worth it”
One of the areas most business owners tend to overlook is the emotional component of value pricing.
Most business owners hesitate with value pricing. “Why do you think they do it- Is it psychological? Or is it just a function of not knowing their numbers?” Spencer digs deeper.
The answer? It’s both: the emotional piece and the quantitative piece. Stephen answers, “If your relationship with money is one from scarcity, you will shy away from value pricing. The first part is letting yourself to feel value."
“I think what helps you feel value is the second part: digging into the details of the numbers.” Stephen adds.
Looking At The Numbers: Uncover billing opportunities
Automated Activity Based Costing (ABC) allows you to take your time sheets and sync it with your payroll to automatically allocate that labor above the line.
“This shows you exactly what's in your gross profit: your cost of goods sold, all the direct labor that your customer directly paid for.” Stephen adds.
“Once you can see that direct labor and all the time leakage that you're not getting paid for, and the real cost with the health insurance, the 401k, the bonuses, the training and the recruiting. You then start to say, Wait...This is worth it and we should be billing for it. I put a lot of money into these people and they're good because we invest in recruiting and training. It makes a difference when you can see the numbers and put your fingers on it.”
The biggest reason why ABC helps your cash flow? Uncovered billing opportunities.
“This is how we've helped clients improve their profits by millions of dollars. Going from breakeven to 15% EBITDA in a year by uncovering time leakage and being able to go to the client with the details of your out-of-scope work- the stuff they ask for but they're not paying for– If you do good work, clients are happy to pay for value.” Stephen Adds.
Raising Prices Without Pushback
Being able to quantify the value of your goods service allows you to find more comfort in value pricing.
“If you can quantify the value that you are actually charging, it's not going to be seen as an additional cost to your customers. They're going to see it as additional value. And so it is a complete win-win situation.” Spencer says. “If it’s quantifiable, it’s not emotional.”
Give clients three choices. “If you give them three choices, they're in control" Stephen explains...
First: Here is your original agreement, and here is what's out of scope. I can stop doing the out of scope work and stay in your budget, or...
Second: I can add these additional values that you're getting, and here's the actual cost of those.
Third: I can help transition you to another service provider (If they are unwilling to pay for the added value or reduce scope).
The formula for raising your prices: look at the client with the lowest profit margin. "Go look at the lowest profit margin clients and figure it out, which ones you need to swap out bad money clients for good money clients. That's how you increase profits and improve cashflow." Stephen adds.