Finance

What are your billing terms to your customers?  What should they be?

If you are giving terms greater than “Net” you are leaving money on the table.  Terms of “net” send a clear signal to your client that you have performed the promised services.  The client has received the benefit of the services.  It is time for them to pay.

Why do some companies offer extended payment terms like “net 10″ or “net 30″?  These terms originated in most industries where a hardgood, raw material, etc. was sold to be converted by the buyer into something else.  The reason for extending the more liberal terms was to allow the buyer time to realize the “value” of the material by selling it to another party in the case of a distributor or converting it into something else in the case of a manufacturer.

As providers of services, the actions we perform for clients, in most cases, have an immediate impact and realization of value.  In the past I have had certain clients push back on “net” terms.  Their argument almost always goes something like this, “we offer our clients 30 days to pay, why don’t you?”  Well, the next time you need to have this conversation, try educating them on the value you provide and the timing of when it is realized.

Action: change your terms to net

Your thoughts?

To your success!

Scott

Treadstone Group, my software professional services company, was doing fine.  We were generating seven figures numbers of revenue from a couple hundred clients.  However, like most B2B professional firms we were subject to peaks and valleys in posting monthly revenue numbers.  Utilization would sway violently from 55 - 90%.   

The swings in revenue were impacting our business negatively in the following ways:

Cash Flow.  We needed to keep large cash balances available to combat shortfalls in consultant utilization.

Employee Stress.  Our consultants would go from a relative calm pace of client engagement to frenetic activity of up to 110% utilization.

Growth Planning.  Forecasting growth in the business and the need to hire additional consultants was next to impossible.

Business Valuation.  The big killer. More about this later.

Boiling the problem down, we were running a project business.  We moved from one project to the next.  Quote it, do the work, move on. Sound familiar? Sure there were usually some bits and bobs after formal completion of the project, but by and large, we were always looking for our next meal.

Fixing this fundamental weakness in our business model required a total rethinking of our “offers” to our clients.  Instead of focusing on a software implementation project, a temporary concern, that our clients had,  we needed to focus on recurring concerns that were fundamental to the daily success of our client’s business.

Our first step in crafting new offers was to spend more time listening to our clients.  Seems obvious, however we had lost sight of this.  We began listening for pain and opportunity.  Here is what we found.

Our clients didn’t like being billed on an hourly basis for sporadic help/support of their systems.  Billing hourly made them far less likely to ask for help. Kind of a bad thing when you need help with a sophisticated ERP system.  Clients also wanted much faster response to their questions.  Internally, we had made a promise of 8 hour turnaround.  Not good enough.

Our solution was a fixed, annual fee support agreement.  Clients were thrilled with their new ability to contact us as often as they needed for an annual cost that they could put in their budget.

For Treadstone, it allowed us to eventually get to 30% of total, recurring, dependable, bankable revenue from these contracts.  As time progressed, we invented more offers that allowed us to take the recurring portion of revenue even higher.

Armed with a dependable stream of cash flow, we grew the business with confidence as opposed to apprehension.  And when it came time to exit the business, our recurring revenue stream increased the valuation of the company substantially.

What offers can you invent to take of recurring concerns your clients have?

To your success,

Scott

When is the right time to expand our service business?  When is the right time to increase our capacity to make more offers and fulfill on more requests from clients?

This is one of the toughest questions the B2B service professional faces.  In a service business, the most significant increase in capacity and potential for increased earnings comes from hiring more people.  For the solo practitioner, this can be a very scary step.  Another mouth to feed.  Another personality to manage. In this post, let’s focus on the financial metrics that can signal us to expand our service business.

The question to ask is:

“will the future revenues of the business be at least enough to cover the fixed costs of an additional person AND maintain the current level of profitability we currently enjoy?”

Let’s take the case of a marketing consultant who currently bills $150k annually.  After expenses, the consultant clears $125k.  The consultant is considering hiring a junior consultant to conduct training and brainstorming sessions for the client base.  The junior consultant commands a salary/benefits package of 75k.

How confident are we that the business can generate $150k plus the additional 75k to cover the consultants cost?   The answer lies in the predictability of future revenue streams.  The predictability of future revenue is determined by the composition of that revenue.  

For the service professional, the most important revenue stream to establish is recurring revenue.  Revenue that comes from fixed price annual client contracts.  All service professionals should devote time and effort to crafting offers of recurrent help to clients. Our skills and offers should be aligned with fundamental business concerns that businesses have and cannot ignore.  Here are some examples:

* updating the company website with new content, graphics, etc.

* training salespeople

* strategic planning

All of the concerns are not one-time events for a client.  They all are fundamental and recurring to the business.

So……………….my rule of thumb is, only hire the next resource when there is an equivalent $$ amount of recurring, bankable, revenue to support the associated costs.  Using this rule, we can afford to invest in good talent and provide them the long-term career opportunities top talent seeks.

Your thoughts?

To your success!

Scott