Clearly, small businesses are important to us all, but only the better managed businesses succeed. In a small business, effective management means properly balancing five factors:
- Cash flow
These are referred to as the five "C"s. Let's take a look at these requirements to see how they affect small business success.
The acquisition and retention of customers are prime concerns of every small business owner because they are the lifeblood of the business, and produce the revenues that make the business run. The old saying that "nothing happens until somebody sells something" is certainly true for every small business.
Customer acquisition and retention can be addressed in a number of ways that are often industry, market, or geographically dependent. They include, but are not limited to the following:
1. Advertising: Small businesses, depending on their target markets and the goods or services offered, use various media to access potential customers. These include:
- Direct mail
- Local newspapers
- Spot TV or radio ads
- Internet listings
- Trade publications
- Directory ads
- Event or charity sponsorships
- Co-op ads with suppliers
To read more about the power of advertising, read Advertising, Crocodiles And Moats.
2. Promotions and Premiums: Many small businesses, particularly those offering services, use discount coupons and offer gifts for various levels of purchases. Discounts given as promotional gifts at sponsored charity events are also popular. Their effectiveness depends on the targeted audience at the event and what else is being given away there.
3. Direct Mail to Targeted Customers: Direct mail can be a very effective and low-cost means to reach potential customers in a limited geographical area, such as by zip code, or with a purchased list with specific demographics, such as affluence, education level, golfers, etc.
4. Referral Discounts: This technique rewards existing customers for providing sales leads from their family and friends. In this case, the lead itself may command a modest discount, and a lead that results in additional business may produce a substantial discount for the referring party.
5. Branding: Branding is a non-product-specific form of advertising designed to enhance the awareness and reputation of the company in the marketplace. It is widely used by large corporations but can also be effective for small businesses that can afford to do it. It tends to be an ongoing and potentially expensive process. (For related reading, see Competitive Advantage Counts.)
6. Customer Service: Providing excellent customer service is essential for every small business because they depend on a small population based in local or regional markets. Good or bad word-of-mouth on their customer service can make or break a company.
A company doesn't have to give away the store on customer service, but must be fair, pleasant and responsive to the needs of its customers. (For further reading, check out Small Business: It's All About Relationships.)
7. Networking: Networking at industry and chamber of commerce events can develop new customers for some small businesses. Those businesses providing business-to-business services tend to benefit most from this type of networking (insurance, financial services, printing, consulting, etc.) as their offerings can be used by a broad spectrum of the businesses attending.
8. Telemarketing: Telemarketing is widely used by businesses offering residential services (driveway sealing, basement waterproofing, etc.). It is a numbers game, relying on the premise that if enough calls are made, some business will be obtained. It is time-consuming and can be limited by people's reluctance to be contacted at home by telemarketers.
9. Signage: Most businesses use signage to identify their location, but signage can also attract business if it is readable and attractive, especially if it incorporates branding.
For a small business, cash flow can be more important over the short term than profitability. A small business owner should protect cash income and outflow, and take the necessary actions to ensure continuing positive cash flow by doing the following:
- Adjusting expenses
- Accelerating receivables collections
- Extending the payables schedule
- Adjusting inventory levels
- Obtaining a bridge loan to fill a short-term cash gap
An unmanaged cash position can cause unwelcome surprises in the form of unmet payroll, late fees on payables and unpaid taxes. Any one of these surprises can scuttle a small business quickly. (To learn more, check out The Essentials of Cash Flow.)
It is a good idea to do a six- to eight-week future cash flow plan, which can provide time to act to ensure a positive cash flow result at the end of each week. Cash flow projection is simply looking ahead at when what revenues are coming in, comparing them to when expenses and payments are due and making arrangements so the balance remains positive.
Credit availability and management is part of the small business owner's tool kit for a number of reasons:
1. Obtaining Payment Terms: With good credit, a business can obtain more favorable payment terms, allowing it to use its money longer and to have inventory longer before having to pay for it.
2. Taking Advantage of Payment Term Discounts: Taking advantage of payment term discounts allows a business with good credit and cash flow to actually pay less for the goods received from its vendors. For example, payment terms may be net 30 days, but discounted by 2% for payment made within 10 days
3. Managing Cash Flow: Having good credit makes access to credit available when it is needed to bridge a short-term gap between receivables and payables due to seasonality, inventory enlargement or business growth.
4. Avoiding COD Hassles on Deliveries: Without established credit, new suppliers will often ship cash on delivery (COD) only on initial orders. This reduces the payables float and pulls staff away from duties to handle COD arrivals.
5. Getting Set Up With New Vendors: Without good established credit, new vendors may be reluctant to allow a new business to handle their product lines and represent them in the marketplace.
6. Providing a Payables Float: As indicated above, having a payables float provides available money to the business over the float period, which enhances profitability.
One of the biggest disadvantages a small business has to overcome when expanding into new niche or geographic markets is a lack of credibility. Because it is a small business, it is not as well branded or well known as its larger competitors.
Potential customers of small businesses may have reservations concerning the size and competence of the staff, the sustainability of the business (are they going to be in business for the duration of my warranty?) or the lack of national branding.
A professional presentation, testimonials, certifications, references and existing customer word-of-mouth recommendations all help. The prospect of dealing with the owner and receiving more personal service can also help small business credibility.
Access to capital is important to a small business when it needs to finance a building, buy new equipment or vehicles, enlarge inventories, or make an acquisition. The establishment of a good banking relationship and a track record of competence, trust, and good judgment with the bank will go a long way toward assuring a source of capital for the business before the specific need for a loan arises. (To learn more, check out Looking Deeper Into Capital Allocation.)
Small businesses represent a vital part of the U.S. economy and employ more than one-half of the non-farm private workforce. They may provide a large and growing employment opportunity for seniors, veterans, women and minorities. But just because small businesses are valued by the economy, doesn't mean they'll survive. By incorporating the five "C"s into your business, you can set up a framework to not only succeed, but also thrive.