Wednesday, 12 March 2008

Making your Business Profitable: Rule #1

Okay, so I'm not a business guru, I'm a geek. But setting up my own limited company to operate as a contractor has taught me a few tricks about business and how to make it profitable. So, going back to basics, how do you make a business profitable? You ensure that there is more money coming in than going out. The money going out part is easy: it's all the bills you have to pay and it's a bit like your personal finances: you've got to make sure you don't overspend. The tricky part is the money coming in because it's different from what you're used to as an employee: the amount that comes in can vary widely and you never know when it will come in. So that's the area to concentrate on. As a result, here is in my (not very experienced) opinion the most important rule of running a business:

Make it as easy as possible for the money to come in.

At that point, you may be thinking about marketing, sales and all that sort of things. But before that, think about the plain boring basics. There are two things you need to get right from the start:

  • Tell your customers how much they owe you,
  • Make it easy for your customers to pay you.

Well, yes, the vast majority of your customers will gladly pay you if you tell them how much they owe you and make it easy for them to pay. So how does that work in real life?

Tell your customers how much they owe you

If your business is retail, this should be easy: just tell the customer when they buy something. In other businesses, like services, this is usually done by invoicing your customer. An invoice can be quite complex, especially when you start taking VAT into account. Some companies spend millions of pounds on invoicing systems. The reason is that the quicker you can invoice a customer, the quicker they will pay you. So spend a bit of time getting it right so that it's easy to do. In my case, I made sure I had a number of document templates for this and that they did most of the work for me. Nowadays, I can just open one of those templates, fill in the number of days worked, the rate per day and it does the rest for me: calculate the VAT and all total amounts. The result is that is takes me about 5 minutes to produce an invoice. Granted, my business model is very simple but it still applies whatever your model is.

Make it easy for your customers to pay you

Think about how your customers may want to pay you and make it easy for them to do so. Rather than theorise on what you could do, I'll give you a simple example.

Tonight, a colleague and I went out for dinner at a Chinese restaurant round the corner. We had a very good meal and were served by nice and helpful staff. We couldn't ask for more. Then came the time to pay the bill. The total amount for the two of us was £28.25 so we added a tip to take the total to £32. Because we have to file in our expenses differently, we wanted to pay half each and get two receipts for £16. I wanted to pay by credit card while my colleague wanted to pay cash. At that point, it all went downhill. For whatever reason, what we wanted to do was impossible. After a good 10 minutes talking to the head waiter, he managed to split the bill provided we both paid cash. From the explanation we got, I understood that the main problem in paying the way we wanted was the till system that just couldn't deal with it and didn't have a manual override.

The end result of that experience is that the problems in paying completely ruined the good experience we had had of the place, meaning that we will probably not go back there, even if everything else was great.

Invoicing your customers efficiently and making it easy for them to pay you may sound like boring mundane details but if you don't get them right, it doesn't matter how good the rest of your business is, money won't be coming in.

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