Do the math…Raise your prices

 

ELLEN ROHR,

contributing writer

 

I subscribe to Fortune Small Business magazine. In a recent issue, columnist Jay Goltz wrote an article called “Do the Math.” He described a friend’s business this way…

 

“My friend was running something of a Ponzi scheme, except that he was conning himself instead of clients.”

 

The article illustrated how you can fool yourself (and your banker!) into thinking you have assets when it’s all just a house of cards. I have seen lots of balance sheets built on faulty accounting. If you are starting to sweat, read on. You can fix your financials and you can turn around a bad financial situation…if you are willing to apply some bare bones business basics.

 

Bare Bones Biz basics…

 

In business, there is ultimately one financial Scorecard: The Balance Sheet. Every other financial report is a subset of the Balance Sheet. This is the Balance Sheet equation…

 

Assets = Liabilities + Equity

 

Assets = Claims on the Assets. This equation is in line with the universal law: what goes around comes around. Or, for every action there is a reaction. It’s how we keep financial score in the game of business.

 

Warren Buffet’s Rules for Business…

 

I love Warren Buffet. The guy makes money the bare bones basic way. He builds companies that make profits. Here are his rules for business…

 

Protect the Assets. The assets are your “stuff.” — what you have. The first financial objective is to protect the wealth you have.

 

Grow the Assets. The second financial objective is to expand the “stuff.” Grow cash and other Assets.

 

That’s the game! Let’s look at the three ways that you can grow Assets.

 

Through Liabilities. You can borrow money. When you buy a new truck, and get a loan for that truck, Assets go up and the Liability (a loan) goes up. Note that there is “good” debt…and “debilitating” debt. It can make sense to grow using debt (buying a truck is a good example), but it gets crazy when you are putting payroll on your credit card.

 

Through Owner Investment. You can put your own money into the company. Perhaps when you got started you wrote a check from your personal checking account and opened up your business checking account. Assets go up and Owner’s Investment (an Equity account) goes up. Again, this may be required to get up and running, but the idea of building a business is to create wealth for you — not to reduce your personal fortune. (Reminds me of the joke, “How do you become a millionaire? Start with $10 million dollars…and open your own business.”)

 

Through Profits. Sell stuff for more than it costs and create profits. Assets go up and Net Income goes up. This year’s profits show up in the Equity section of your Balance Sheet. When you lose money — sell stuff for less than it costs you — Equity goes down and Assets go down. That’s the elegant, beautiful, sometimes horrible truth of the Balance Sheet.

Are you winning or losing the game?

 

Take a look at your Balance Sheet. Go line by line down each account. Do you know what each account represents? Find out. These are your Assets, Liabilities and Equity. It’s your responsibility to KNOW where you stand. If you have been lax about understanding your financials, I suggest that you step up. Verify that the Balance Sheet is current and accurate. I call this getting to KFP…a KNOWN financial position. You may need some help if you don’t understand the Balance Sheet….or if it looks like a slinky-knot mess of numbers and dollars. Have a sit down with your bookkeeper and accountant and go line by line down the Balance Sheet and ask, “What is in this account? Is it right? How can we verify it?”

 

(BTW, at www.barebonesbiz.com, I am giving away free pdf copies of my book, “Where Did the Money Go?” This book helps you understand basic accounting terms and reports. It can help you get a better understanding of the Balance Sheet and the Income Statement.)

 

Make sure the Balance Sheet is right. Then, take a look at the numbers. If you have more Liabilities than Assets, you are going backwards. You’ll have a negative Equity balance. You may be able to fix it. The long-term fix addresses the reason you got in trouble in the first place. You have to charge more than it costs. And you have to have enough Sales at the right price to cover all expenses and make a profit. You might be able to borrow more money and you may be tempted to put more of your own money into the company. You might even entice an investor to infuse some cash. However, the only way to create wealth is to generate profits.

 

Profits solve lots of problems

 

Chances are good that you have been undercharging your customers. Chances also are very good that you could improve your sales, communications, marketing and operational systems. You could improve each of these areas of your business. You could start generating 10 or 20% profitability; that can solve a lot of financial problems.

 

Here’s a list of action items that can turn things around at your company:

 

• Put a Biz Plan together. Think about what you want and write it down. If you really don’t want to be in the business you are in, you don’t have to keep doing it. If you do, take inspired action to move you in the direction of what you want. Think and act.
• Let go of the people who are sucking the life out of you, and money out of the business. You know who they are.
• Get to KFP. You gotta know.
• Collect old Accounts Receivable or write it off. Get real.
• Put a Budget together. Set financial goals and come up with a reasonable selling price.
• Review the Budget and put real salaries, benefits and operating expenses in. Add some padding for debt reduction and things you don’t see coming. Come up with a better selling price.
• Put a debt reduction plan in place and implement an auto-withdrawal debt reduction payment. Work out payment plans with your creditors.
• Adopt a “Take their money now” policy and get paid when you do the work. Don’t take credit cards? Get it set up. You are not in the business of loaning money.
• Job Cost the big jobs and update your bidding procedures. Make sure you have enough hours in the jobs you sell, and that your install crew is trained and equipped to get them done on time.
• If you haven’t already, make the move to flat rate pricing. Customers want to know, before they commit, how much it’s going to cost.
• Craft a simple, easy to use price book. Customize a “canned” package or make your own.
• Adopt a Sales Trainer — one who doesn’t insult your soul — and teach yourself and your team how to improve your communication, service and sales.
• Engage a Marketing Plan. If all you can afford to do right now is go door to door and offer to be of service, do that. It works.
• Create written procedures. Practice those procedures. Hold folks accountable for using them.
• Compare actual performance to budget and make changes as needed. Make enough sales at the right price. Tighten the belt on expenses. Be profitable every month.
• Have fun playing an honorable game!

 

Check out Jay Goltz’s article at www.fsb.com. The way to keep from digging the hole and building the house of cards in the first place is to MAKE MONEY. If that means having a selling price that’s three, four or five times higher than the going rate in your market, so be it. Figure out how to be better, faster, nicer, cleaner, more sober, more fun and more knowledgeable than the other guys. Do your best to communicate the value of your services so your customers say, “They are expensive, but they are worth it.”

 

There are worse things than going out of business. Like building a mountain of debt or getting into tax or bank fraud trouble. You could go out of business. (It may be your best, most liberating option.) Or, you may be able to fix the one you’ve got. Ready to make the leap to profitability? I challenge you.        

 

Ready to break FREE? Join me for The Challenge. Build a rockin’ Biz Plan at www.barebonesbiz.com. You also can reach me at 417.753.1111 or contact@barebonesibiz.com.