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Cash Management

2 Posts authored by: Carol Roth

As an entrepreneur, you will probably face a handful of major consistent dilemmas, but one of the most persistent and complex is the way you approach the value of your business. This boils down to a struggle between running your business to maximize cash—that is the money that you have in the bank each year—or to maximize equity—that is the overall value of the business entity.

 

These choices are very much at odds.

 

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Maximizing cash means that you may take on non-core clients because, well, they bring in more cash! It also means that you pinch every penny and may make decisions that payoff a little today, but don’t add value in the long-term. This includes forgoing investments in arenas like marketing and personnel that often require a cash burn before you see a return on the investment.

 

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The benefit to a cash maximization strategy is straightforward; you have more visibility and predictability of cash coming in, year after year.

 

The downside is substantial though. By focusing on cash and forgoing investments, big and small, you may limit the upside opportunity for your business.

 

Running your business to maximize equity requires an iron stomach. It requires more risk-taking but with the promise of more rewards.  Because you are focused on building long-term value, you are laser-focused in your offerings of products and/or services, and you won’t take on non-core clients solely because they have cash ready to spend.

 

It requires not being cheap, too. It means that you invest in the best people, even when maybe you can’t technically afford them. It means dollars focused on sales and marketing and not watching every penny like a hawk. Certainly, it doesn’t mean you spend like there’s no tomorrow but it does require spending like you anticipate tomorrow is going to be big.

 

This can lead to less money available for you to pay yourself and can even require outside capital, whether that be equity or debt.

 

So, when do you make the shift in strategy? Like anything, it is part art and science.

 

If you have not set yourself up financially (for example, you have lots of personal debt, little or no savings and substantial rent or a mortgage due), it may be difficult for you to stay in the mindset required for equity maximization. So, work on paying down personal debt and getting yourself in position to have a few years of financial flexibility first. And note, by financial flexibility, I mean you can feed yourself ramen noodles, not four-star meals.

 

If you have some financial flexibility and you can get comfortable with the discomfort of being a risk taker, then really think about trying to pursue equity maximization for a few years, as it will take time (and always more time than you expect). If it pays off, you will have a much bigger business that should allow you to increase your return on investment by multiples of any cash return you would otherwise receive. The reality is that if you are taking on the risk of being self-employed, you might as well shoot for creating some serious value to the business and not just creating a job for yourself.

 

It’s a constant dilemma, but one that should be carefully considered, as the risks and rewards of pursuing cash vs. equity returns are substantially different.

 

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About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

You've probably heard that it costs about five times more money to acquire new customers versus retaining existing ones. Obviously, the expense and effort of acquiring new customers can be worthwhile. That said, are you doing everything that you can to maximize profits based on your current customer base?

 

Your customers already value your product or service, so it’s extremely cost-effective to try to get them to buy more from you. Follow these 5 tips to get more from the customers that you already have cultivated.

 

1. Add higher revenue and margin items to your offerings.

Whatever products or services you offer, you probably can add some extras that provide greater perceived value to the customer while maximizing your profits.51918417_s.jpg

 

There's a reason why fast food chains ask, "Do you want fries with that?" With a profit margin of around 75 percent, they are probably the most classic example of high-margin product add-ons. Your sales staff can easily increase profits by forming the habit of offering an extra pack of batteries or other related items when they sell electronic devices or a yearly website audit when creating a new website. So, when customers and clients make a purchase, have related products and services to suggest.

 

2. Incentivize more frequent purchases.

Sometimes, regular customers will buy your products or services more frequently if you just remind them that you're out there. For example, when a personal trainer calls customers to suggest that more frequent visits will help them reach the fitness goals that they've nearly achieved, the extra business can be significant.

 

Don't forget the value of loyalty programs, either. Caffeine-driven customers often stop by more frequently to get their cards punched when a free latte is in the offing. As a small business owner, you know your customers well. Target their current buying habits and untapped potential to identify the incentives that might encourage more sales.

 

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3. Clear low-margin products from your sales offerings.

Are all the products that you sell profitable enough? By necessity, you may need to devote some shelf space or service offerings to certain products and services that customers demand — or items like parts that support higher-profit items. But, when the acquisition, storage or performance costs don't justify selling certain items, maybe it's time to just say no.

 

Keep in mind that the real profits might reside with small companion products rather than the larger purchases. Think about the new battery-operated TENS device sold for pain relief. You might sell a device one time for about $100, which may represent a relatively moderate margin. But the repeat-purchase of required electrode pads, batteries and other parts typically have high margins. This can turn one-time customers into guaranteed, repeat high-margin sales opportunities.

 

4. Beat the competition and raise prices.

Knowing your competition is not just about staying within the pack. If you know what they do — and how well they do it — you may find that you do it better. Whether you advertise your company's superiority or if your customers already recognize it, they may willingly pay a premium price to continue buying the best.

 

Related Article: What Your Prices Say About Your Small Business

 

5. Vigilantly watch the expense side of sales.

Organic growth is vital to every company, but this doesn't mean that costs aren't important.

 

It's all about the margins. Perhaps, you can shave dollars off regular parts purchases by finding a new vendor. Or, if you have the available space for extra inventory, consider buying in bulk. If you can get comparable delivery and the same quality, these savings go directly to your profit margins.

 

Don't forget to look at processes and personnel. How much do you spend on unnecessary steps in product or service development? And, are you paying a high-priced employee to do work that can be performed just as well by an entry-level person? The cost savings of a tight operation translate into more money for your business without raising prices or adding more customers.

 

Take full advantage of all earnings opportunities.

Every business should continuously examine ways to sell more products or services. However, small businesses in particular need to keep a sharp eye on available resources before taking the steps needed to sell to more customers. Make sure that you're not leaving money on the table that can make a real difference to future growth.

 

Related Article: 10 Easy Ways to Quickly Boost Sales

 

 

About Carol Roth

Carol Roth Headshot for post.png

Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including

host

of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.

 

Web: www.CarolRoth.com or Twitter: @CarolJSRoth.

You can read more articles from Carol Roth by clicking here

 

Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

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