Posts Tagged ‘service’

Have A Down Payment Pricing Policy To Speed Up Cash Flow

June 29, 2010

by Doug Smith, President, The Woodhaven Group

Does your business perform a unique service or make a custom-made product?  If so, start including a down payment requirement when quoting a price for services or products.  This will dramatically speed up your business cash flow.  Combine this with extended terms from suppliers and that line of credit at the bank may not be needed.

Many companies are reluctant to ask for a down payment out of fear that it will upset the customer.  Our society has trained customers to expect to pay a down payment when purchasing certain products and services.  Most consumers would expect to be asked for a down payment when purchasing a home or car.  Unless your business is a retail transaction in a store where the customer gets the product immediately (ie:  restaurent, drug store, oil change, etc.), then try this tip and see your business cash flow take off.

It should always be a policy that any custom product or service  should require up to 50% down payment.  These funds early in the transaction can be used to offset materials & labor, marketing, and sales cost.  Or, just put the cash in your bank account and earn interest.  By receiving a down payment it also shows commitment on the part of the buyer.

Examples of a few products or services that should be getting up front down payments are:

  • Landscaping projects
  • Website design
  • Home or commercial remodeling of any kind
  • Caterers
  • Interior decorators
  • Direct mail design and production
  • Tailoring
  • Machine shops
  • Excavation
  • Dock repair or replacement
  • Mold remediation

Always make sure a complete purchase order or contract is signed by both parties spelling out the contract price, amount of down payment and balance owing so there is no misunderstanding at the end of the job how much the final payment will be.

Put this pricing policy in place today and watch your business cash flow immediately increase.

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Use The Lifetime Value Of A Customer To Increase Cash Flow And Profit

May 19, 2010

by Doug Smith, President, The Woodhaven Group  

To grow your business you need to retain your most profitable customers.  By keeping a customer who is profitable for the company it adds stability to the organization while increasing all important cash flow.

Lose customers and your business will find itself spending expensive upfront marketing dollars always acquiring new customers to replace ones that went to the competition.  Marketshare does not increase, profit becomes stagnant at best and cash flow suffers.  Consider it lost opportunity.

Some owners and CEOs say that they are satisfied to always be prospecting for the next new customer.  Losing customers, in their opinion, is just a cost of doing business.

These owners would not think this way if they took the time to calculate the lifetime value of a customer.  What is a customer worth?  Knowing this number gives the owner information that helps in developing and executing sales, marketing and operational strategies.  This knowledge becomes a competitive weapon allowing your company to utilize unique promotions or incentives since it becomes easier to identify your true return on investment per customer.

The lifetime value of a customer is really the profit generated from the sales of a customer over the liftime of buying from your company.  It is best to calculate using  group averages broken down by product category.  This allows you to then decide where to spend the most dollars to retain a specific group of existing customers.  Also, based upon the lifetime value of certain groups it shows marketing and sales where to invest the most dollars to acquire new customers.

The best example of explaining  the lifetime value of a customer calculation was in a Harvard study years ago. Read the Harvard customer study here.

As a CEO of a department store I not only knew the lifetime value of the lady shopping but also the lifetime value of her husband and 3 children as a family group.  I knew that if I satisfied the 3 children growing up shopping in the store I would have their 3 families as lifetime customers when each of them got married and had kids.  You can imagine how I calculated the lifetime value of a multigenerational family.  In some cases I had 3 generations of the same family as loyal customers.  It made an easy decision to happily accept that returned gift after Christmas.

The takeaway:  Know the lifetime value of your customer and never take that customer for granted. Now when you lose an upset customer because of poor customer service you know exactly how many dollars just walked out the door.

Consider Early Pay Discount To Increase Cash Flow

May 9, 2010

by Doug Smith, President, The Woodhaven Group

Many industries have a traditional preset discount off the invoice for paying early.  As the customer I used to take advantage of an 8% discount if I paid my supplier by the 10th of the following month.  The invoice was due, otherwise, at the end of 30 days.

As a provider of a product or service your business may want to consider implementing an early pay discount. The discount may only be 1-2% but will be enough to entice some customers to pay early.

The key decision for your company is balancing the bottom line profit impact against the potential for increased cash flow from your customers.

Here are some thoughts to guide you in your decision making:

  1. Does your industry currently offer a discount for early pay?  If not, then this could be a way for your company to differentiate itself from the competition.  The result could be added sales as the early pay discount is perceived as added value by your company and you can steal marketshare. The fact that the customers you acquire would have strong cash flow (evidenced by the ability to take the discount) would be a plus. 
  2. An ongoing argument against early discounts is its potential negative impact on profits.  Can the discount be passed on as a price increase?  Your customer may not balk at a 1-2% increase in prices if it has been some time since the last increase and you provide a high quality dependable product.  If you are concerned about implementing a price increase at this time  then wait and piggyback the increase on top of an increase in price in the future.
  3. What is the interest cost to your company to currently fund  accounts receivable?  This should be factored into the profit computation.
  4. Also, determine if there is operational savings realized by having less accounts receivable to collect due to accelerated payments.
  5. Not everyone will take advantage of the early payment discount.  For those who do not, if a price increase is in place to support the discount, then your company just realized more gross margin dollars and percent.
  6. You cannot let a customer pay late and take advantage of the early pay discount.  An aggressive accounts payable manager will attempt this if you do not catch it and cut it off.  Assume this will happen.  
  7. Invoices need to be received at the same time the product is delivered so that your customer has time to process the early pay discount. You do not want to give your customer an excuse for taking the discount late.  
  8. Your best creditworthy customers will take advantage of the discount.  Prior to your company offering a discount your customer was most likely aggressive in delaying payment as long as possible to preserve their own cash.  The trade-off, as discussed earlier, is faster availability of cash for your company back against the discount cost. 

Which is the best way?

In my opinion, I want to find a way to make an early pay discount program work with a minimal cost to my profit.  I believe the quicker I can get use of cash the faster I can put it to work and  the greater potential there is to increase my overall return on investment.

I would be interested to know what your experience has been.