Over the last few weeks we have noted the importance of PEOPLE and PROCESSES to ensuring a business / organisation generates real success and adds value for all stakeholders in the business. However many fail to look at that most important of items - the product we offer.
Product
Your company is producing widgets at a cost of $1 each and selling them at $3 each. Your income statement has reported positive net income every year for the past ten years. Yet, you are now filing for bankruptcy. There are so many seemingly successful businesses that have failed. Why? Because they were using profits as their measuring stick, but profit is not synonymous with cash. You sell your product and report the revenue, yet you never collect payment. You constantly outlay cash for capital improvements and spread the depreciation expense over twenty years. Your debt matures in a tight credit market and you can't refinance. There are many scenarios that your income statement and profitability alone won't tell you.
When it comes to your product (or service), your net cash is determined by what it costs, how much you can sell it for, and, as mentioned previously, when you pay and when you collect. When you collect is not only a function of your billing practices (which you control), but also the quality of your customers. In a retail environment, you can't really control the quality of your customers, but then again retail is typically a POS, so it doesn't matter. In other businesses, you would want a good procedure for conducting credit checks for new customers, as well as monitoring performance for existing customers. You may be tempted to offer prompt pay discounts, but keep in mind that if taking such a discount is good for you, then giving such a discount might not be. Instead, consider less attractive pricing for slow payers. If you happen to lose a bad customer along the way, you might be doing yourself a favor. There are simply some customers you can't afford to do business with.
On the payment side, in addition to striking the right balance between price and terms as discussed earlier, consider alliances with strategic suppliers. Again, perhaps a bit more difficult for the smaller company, as the key is to identify suppliers for whom you represent a significant amount of business. Your success is therefore vital to their success. I have seen some successful cases where the key supplier was allowed to set up shop on the company's premises, with on-site inventory and personnel dedicated to exclusively serving the company. In such cases though, one needs to keep a close eye on the controls around the transactions between the two parties.
here to edit.
Product
Your company is producing widgets at a cost of $1 each and selling them at $3 each. Your income statement has reported positive net income every year for the past ten years. Yet, you are now filing for bankruptcy. There are so many seemingly successful businesses that have failed. Why? Because they were using profits as their measuring stick, but profit is not synonymous with cash. You sell your product and report the revenue, yet you never collect payment. You constantly outlay cash for capital improvements and spread the depreciation expense over twenty years. Your debt matures in a tight credit market and you can't refinance. There are many scenarios that your income statement and profitability alone won't tell you.
When it comes to your product (or service), your net cash is determined by what it costs, how much you can sell it for, and, as mentioned previously, when you pay and when you collect. When you collect is not only a function of your billing practices (which you control), but also the quality of your customers. In a retail environment, you can't really control the quality of your customers, but then again retail is typically a POS, so it doesn't matter. In other businesses, you would want a good procedure for conducting credit checks for new customers, as well as monitoring performance for existing customers. You may be tempted to offer prompt pay discounts, but keep in mind that if taking such a discount is good for you, then giving such a discount might not be. Instead, consider less attractive pricing for slow payers. If you happen to lose a bad customer along the way, you might be doing yourself a favor. There are simply some customers you can't afford to do business with.
On the payment side, in addition to striking the right balance between price and terms as discussed earlier, consider alliances with strategic suppliers. Again, perhaps a bit more difficult for the smaller company, as the key is to identify suppliers for whom you represent a significant amount of business. Your success is therefore vital to their success. I have seen some successful cases where the key supplier was allowed to set up shop on the company's premises, with on-site inventory and personnel dedicated to exclusively serving the company. In such cases though, one needs to keep a close eye on the controls around the transactions between the two parties.
here to edit.