Archive for July, 2009

On Being Responsive to Customer Demands

Tuesday, July 28th, 2009

Not much time today, but I wanted to get this short post out before I’m off for the day. Right now I’m in Tirupur, India doing a one week consult at a large apparel company. During the peak of their season they produce 50,000 units a day. The company is very, very modern with about 10 MHM presses and a couple of M&R pressses including an 18c Challenger II. They have automatic coating, soon direct to screen and an up-to-date imaging and prepress department. I have seen this situation many times in the past. Basically a 3rd World location but facilities anyone in the States would drool over. This is not what I want to write about today.

One of the biggest challenges on the horizon in the U.S. and abroad for that matter is the PVC free, Phthalate free issue. Big companies like Nike and Marks and Spencer in the UK are demanding that garments screen printed be free of these chemicals. They are abundant in traditional plastisols. The contaminent levels are ridiculously low as in 0.1% or less. It is a major, major pain to make the switch to become compliant. I know I will probably catch some flack for saying that, but it is the truth.

The point of all this is, my Indian client has made the commitment to switch entirely to waterbase inks, scrub everything inside and out, completely strip all their frames, squeegees, and flood bars, and generally go to extreme lengths to eliminate ANY possibility of contamination. They are not required to do this, it is entirely a voluntary effort on their part. It is an extreme effort and very, very expensive. Why are they doing it?

The answer is very simply. The owners of the company are visionary. They see the pressures worldwide within the Green Movement and the rising consumer demand for accountability. They also listen very closely to their customers and what they are saying. This is their proactive response to position themselves as responsible and progressive for the mostly EU markets they serve. They should be commended for their efforts and we should all use them as an example of responsiveness.

What are your customers trying to tell you? What are they saying about you? Do you really know or it is a best guess on your part? A great exercise, and one that will add credibility and value to your relationship is to ask them what’s important to them. Don’t let them off the hook. Formulate 5-8 questions that will really get them thinking about why they use you and what you could do better. After you’ve asked 20 or 30 of your customers the SAME set of questions, and had a conversation with them about the answers, you’ll have a pretty good idea of what the pulse of your market is. This will give you the fuel, and starting point to proactively take a leadership position in delivering goods and services that go beyond just a printed garment.

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Brand Comfort - Confidence in a Far Away Place

Sunday, July 26th, 2009

I’m in Tirupur, India all this week, half way around the world from California where I live. Tirupur is in southern India about 1 hr flight time West of Chennai (Madras). It’s the center of the Indian knitwear region and has many significantly sized textile operations that supply blank as well as printed apparel for some of the world’s most notable brands.

Tirupur is also a fairly poor area, at least on the outside. I’ve been to many factories in developing countries and Tirupur fits the profile of many of them. Whenever I travel to lesser developed areas it always comes with the warning “Don’t drink the water.” This is usually very good advice.

It’s always a chance you take, even with bottled water. I’ve been in situations, more than once, where the locals will fill the bottles out of the tap and then super glue the caps back on to make it look like they are sealed. I’m always wary.

So we come to the topic of today’s post. When I got to my room at the Hotel Angel (an oasis for me!), what did I see on the table? There, in front of me was the familiar transparent blue label of Pesico’s Auqafina brand bottle drinking water, exactly as I know it in the US. My spirits peaked as I picked up the 1 ltr bottle to read the outside.

It was indeed bottled in India, but they went to great lengths to calm any concerns I might have. From the lablel:

“This bottle contains water treated through our 5-step State-Of-The-Art process that comprises UV treatment, reverse osmosis, ozonization, carbon filtration, and sand filtration. It goes on to label prominently “International Tamperproof Seal.” There are at least three quality badges or insignias on the label as well.

This is a clear case of not only the value of Brand Identity, but going further to reinforce the trust and safety of the product. Guess what? It works for me.

When I was in the hotel restaurant last night, I asked for bottled water and the waiter again brought out the Aquafina. He presented it to me so I could read the label and inspect the cap seal. I very much felt like I was confirming a fine wine selection. I commented to the waiter after looking at the bottling date on the cap that ” The April 9th, 2009 bottling was a particularly good bottling.”

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Going Outside Your Geographic Area for New Business

Saturday, July 25th, 2009

There comes a time when you have to decide if going outside your local market is necessary and wise. My experience has been that going outside can be one of the best things you could do. The physical location of your business is no longer as important as it was in the past. Doing business over the Internet is now quite normal.

If you still like to have the one-on-one contact a local relationship involves, here are a few tips that can be incredibly helpful for you. First, recognize that one of the most powerful things you can do is establish yourself as an expert in your field. You can do this with a direct mail newsletter, blog, website, or eZine (electronic newsletter.) When you send out informative articles and clips on a regular basis, you establish your credentials as an expert.

Secondly, use your existing customer base to make introductions for you. Go to your best customers and clients and ask them if they will help you develop some new accounts outside the area. Ask them who they know in their industry or field that would benefit from your services in the same way they have. Very few will turn you down.

Prepare a short introduction letter in Microsoft Word and give it to your clients to mail or email on your behalf. It should be written as if it is coming from your client. Don’t brag or pitch. It should say something to the effect that:

I normally don’t endorse other companies products and services, but today I’m making an exception. I want to introduce you to (your firm). They have done an amazingly professional job working with us over (some timeframe.) We’ve seen real tangible benefits by following their advice and using their services.

(your company’s) services may or may not fit in with what you’re doing right now, but I think this is a great match and I wanted to pass it on to you in the hopes they will be as successful with you as they have been for us.

In today’s tough economy we can all use new resources that will help to make our businesses better and improve our sales. If our success is any indication, you would be well served to talk with (You.)

When you’re endorsed from a distance, you gain immediate credibility as being “The Expert From Afar.” This is an incredibly powerful way of getting introduced, establishing your credentials, and shortening the sales cycle.

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I’ve Got This Great Idea For a T Shirt! Part Two

Friday, July 24th, 2009

Having a great idea for a t shirt is just the beginning of the process. Getting it produced and marketed properly is a formidable job. Your two options are shortrun digital Direct-to-Garment (DTG) and traditional screen printing. DTG has a different look and fell than traditional screen printing and many consumers still feel screen printing is what they know and love.

For those who want the quality of traditional screen printing, there are a few things to consider. First, it takes more preparation at the front end to get the designs ready to print and on the screen. To keep your costs reasonable, you’ll need to do at least a couple of dozen shirts.

Second, before you go to all the expense of printing up a bunch of expensive samples do some basic market research to see if other people are as excited about your design as you are. Start by doing a Google Search (Your Design Idea) + T Shirt. So for instance do a search for: Michael Jackson Tribute + T Shirt and see how many other people are thinking the same thing you are.

Here’s an IMPORTANT TIP - you want competition. If you don’t find anybody who’s doing something similar, it usually means it’s a weak idea or you haven’t hit the key idea in a way others will recognize. If you find Michael Jackson Tribute T Shirts (and there will be a ton right now,) you’ll know there are other people who have gone to the trouble to develop and market a similar idea. This is a really good sign.

If you’re encouraged by what you find, it’s onto the production step next. With DTG, you pretty much go to the company website and follow their instructions. Screen printing is a bit more involved. The printers will tell you what they want you to supply and in what form.

Here’s a hint, DO NOT do your art work in Microsoft Word or Power Point. They are unacceptable formats. DO NOT do a screen capture from a web page. You’ll get horrible quality. Ask the printer for guidance on the file format and preparation.

Go the extra mile and get the art done right from the beginning. Great art is what sells shirts. When you have a great idea, you get their attention, but it’s the art that closes the deal. If you need to, get a REAL graphic designer to do the art for you. Having your cousin who has Photoshop do the art for you is like doing brain surgery on the kitchen table. Results are not going to be good.

Finally, when it comes to screen printed t shirts, NEVER use this approach: ” Give me your quantity price break on 1,200, but I only need 12 right now. We’re going to sell a ton of these.” It’s almost a sure way to get the boot. Every printer on earth has heard this line almost as many times as “I’ve got this great idea. . .”

Do this. Tell the printer you understand the set-up fees are front end costs. Ask them at what quantity the set-up is free. This becomes the point at which you can negotiate for the rebate of the set-up costs.

So if the free set-up is at 1200 pieces, negotiate a rebate of the costs when you hit this quantity. This way, the printer is covered up front AND you get the set-up fees back if you really do hit the big time. You’ll also find the printer has raised their level of respect for you because you’re sensitive to their issues, you talk the lingo, and you’ve done some homework on this project.

There is nothing that beats the excitement and satisfaction of creating a great t shirt and having it take off. Follow these guidelines and you’ll have a much better chance of being one of those successful few in hitting the big time with their great t shirt idea.

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I Got This Great Idea For a T Shirt! Part One

Wednesday, July 22nd, 2009

Over the years I bet I’ve heard this over a thousand times. It almost always happens when I meet someone I don’t know and explain to them what I do. As soon as they hear “I print t shirts” out comes the idea. They’re always excited about it and they all think they’re going to make a million dollars with the idea. So, here are a few thoughts on the marketing of t shirt ideas.

Before the Internet, having a good idea for a t shirt was like having a good idea for a book. The chances of anything happening were almost impossible. At best they would invest a few hundred dollars in art, screens, and production of a dozen shirts or so. They would give some to their friends and try to sell the rest.

In the 36 years I’ve been doing this business, I’ve only seen a handful of success stories. Those were people who already knew a thing or two about marketing anyway. All the others got an expensive education in Marketing 101.

With the Internet things have changed. The technology has changed too. Today you can use any one of a number of digital Direct-to-Garment (DTG) companies like Cafe Press, Zazzle, or Printfection. These companies allow you to create great one off images and they’ll even help you market your ideas across the Internet.

Second, before you go to all the expense of printing up a bunch of expensive samples do some basic market research to see if other people are as excited about your design as you are. Start by doing a Google Search (Your Design Idea) + T Shirt. So for instance do a search for: Funny Cat + T Shirt and see how many other people are thinking the same thing you are.

Here’s an IMPORTANT TIP - you WANT competition. If you don’t find anybody who’s doing something similar, it usually means it’s a weak idea or you haven’t hit the key idea in a way others will recognize. If you find 50 Funny Cat T Shirts (and there will be a bunch,) you’ll know there are other people who have gone to the trouble of developing and marketing a similar idea. This is a really GOOD sign.

If you’re encouraged by what you find, it’s onto the production step. In the early stages of your business, it’s probably best to go with digital DTG. With DTG, you pretty much go to the company website and follow their instructions to upload your art. Many websites will now allow you to build your design online in their design lab. This is an OK approach, but you are much better off doing your design work offline and simply uploading it through their order page.

You’ll want to make sure you have the art in the proper format. Here’s a hint, DO NOT do your art work in Microsoft Word or Power Point. They’re unacceptable formats. DO NOT do a screen capture from a web page. You’ll get horrible quality. Ask for guidance on the file format and preparation.

If you really believe in what you’ve got, go the extra mile and get the art done correctly right from the beginning. Great art is what sells shirts. When you have a great idea, you get their attention, but it’s the art that closes the deal. If you need to, get a REAL graphic designer to do the art for you. Having your cousin, who has Photoshop, do the art for you is like doing brain surgery on the kitchen table. Results are not going to be good.

With a few shirts in hand, it’s off to the races to see how many you’ll sell and how fast. Remember, the more people you can get your shirt in front of, the more exposure you’ll have. YouTube and Flickr can be great for this. Be sure to link to your sales page url so everyone who sees it can buy it.

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The Principle of Reciprocity - Giving Free Stuff Away in Order to Receive

Thursday, July 16th, 2009

When I talk to printers about how they market, I get a number of different answers. By far the most common one is, Word-of-Mouth. This is great, but unless you have a plan in place to maximize the result, it can be unpredictable at best. There’s no doubt it’s the most cost effective (free) form of marketing, but you give up a regular stream of business unless you go about it differently.

Another very common one I hear is, “We sponsor fun runs and events in the community.” This usually means either contributing the shirts and printing, or heavily discounting the printing costs for the group or function. This leads me to the the discussion in today’s post; the value of Reciprocity.

Reciprocity is the principle that if you give, there’s an implied obligation to respond in kind. This is an age old principle. It’s led to the saying “There’s no free lunch.” Simply put, there’s always an expectation of a return favor. Obviously this can have sinister implications if it’s used for personal gain. On the flip side, we can use this principle to increase our marketing efforts and help give teeth to those weak sponsoring relationships and inconsistent Word-of-Mouth referrals.

We’re all aware of the practice of free samples. If you’ve ever been to a Costco on a weekend, they’re at the end of almost every food aisle giving samples of salsa, chips, sausages, cheese, salami, you name it. I know this must be effective because I watch how many people actually put the product in their carts after sampling. It’s amazing. If you’ve never watched, make a point the next time you have the chance.

We can do the same thing. We don’t even have to give away printed shirts or embroidered hats. We can give away information products that make it easier for the consumer to make a buying decision. One of the best ways of doing this is to put together a consumer awareness guide that contains all the right questions to ask potential vendors.

We’ve all see the comparison charts with the checklists. This is a great way to level the playing field. I even go so far as to provide a chart for them to fill in. They can add the name of the vendors they’re shopping at the top and then check off the answers as they talk to each one. This is a great way for them to realize it’s not about buying from the guy with the cheapest shirts.

You can expand on this concept and provide short pamphlets on specific subjects. Things like “Buying T Shirts for Your Family Reunion.” or “Making Your T Shirt a Hit at Your Event.” The idea is to inform and educate, but not sell. Of course you’ll brand every page with your logo and phone number. Be sure to add something to the effect of: “Prepared as a public service by (name of your company.)

The point here is two fold. First, it’s very inexpensive to do this. Secondly, the more information you can layer on, the greater the reciprocity factor. You’re seen as the knowledgeable expert doing the consumer a favor. Even if you don’t get the initial order, you can be sure you’ll have made an impression which will positively reflect on you when the Word-of-Mouth factor comes into play.

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How Long Does Your Sales Cycle Take?

Wednesday, July 15th, 2009

How long does it take to make the sale? With the pressure from the economy ever present, this is the question we should all be asking. Keeping your sales pipeline full of prospects depends on your understanding of the sales cycle and how long the development of the cycle is. The longer the cycle, the more prospects you need in it.

Our business is guilty of what I call “sales by necessity.” This simply means, when the pipeline gets thin, we go out and try to drum up business. I’m guilty of this just like you are. When times are good, we don’t do any of this, we simply let the work come in and we stay busy. When it slows down, we start calling past customers or start pitching potential new accounts.

This is confusing and annoying to the prospects at the same time. It’s no wonder the reception is lukewarm at best. This is sales driven by our needs, not the needs of the customer or client. I’ve been watching many different industries for several years now and the sales cycle question is common across all of them. The way it’s handled in each industry differs.

The Internet Marketing community has it together the best. They understand the real value of their business lies in the relationship to their list. The “list” can mean prospects, joint venture partners, endorsed mailings, past customers, and current customers. They have metrics in place to measure effectiveness and they can tell you exactly what it costs at each phase of the cycle. Very impressive compared to how we do it in this business.

I harp all the time about getting your customer list together and keep it updated. At the very least, regular contact via a physically mailed newsletter or even a regularly scheduled email will do wonders in reminding those you do business with that you’re still around and open for business. You don’t need to pitch anything, although having specials, sales, etc. doesn’t hurt either. It’s the common courtesy of keeping in touch instead of constantly going to them when you need work that makes them appreciate you more.

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How Innovative Do You Want To Be?

Tuesday, July 14th, 2009

Innovation. One of the key things that’s supposed to differentiate you from your competition. It’s one of the things we value the most about being in business for ourselves. We’ve been told “If you build a better mousetrap the world will beat a path to your door.”

I used to believe this. It’s been one of the things that’s driven me and my businesses over the last 35+ years. But when I sit down and really look at the history and experience of the innovations, and the resulting business that’s resulted from those innovations, I have to take pause.

Personally, I derive a great deal of satisfaction from innovation. I love solving problems and finding a better way of doing things. But there’s a problem with it. Often the problems we choose to solve are only problems for us, and not others. At least, it isn’t a problem for them yet. And there in lies the dilemma.

People and companies that make innovation a key part of their existence position themselves at the front of technology, the market, or whatever. They’re at the cutting or bleeding edge. We used to joke about it, but when times get tight, business is off, and cash needs to be conserved, being on the bleeding edge can be dangerous to your business health. I don’t think it’s any coincidence the companies that innovate the ideas and introduce them are rarely the companies that make money with them.

Here’s the problem. For those on the edge, the problem is apparent and this triggers the need to solve it. For those not on the edge, well, they many not even know a problem exists. When this is the case, the innovators have to take valuable time and spend a bunch of money to educate the market to the extent and need for the problem to be solved. This diverts resources away from the innovation. Since the problem isn’t compelling for them, it’s easy not to embrace or invest in the solution.

Over the years, on more than one occasion, people have approached me at seminars, workshops, tradeshows, and so on and said something to the effect: “Mark, most of the time I don’t know what you’re talking about, but I know I’m going to need to know about in the future.” I used to laugh at it, but it got me to thinking what they were really saying.

It comes down to this. New, innovative ideas, inventions, procedures and the like are of little or no value unless they are tried, implemented, and embraced by the market. We all want a competitive advantage, but it is a thin line we walk between being too far out and having an advantage.

One of the main reasons I write and speak is to expose ideas. I’ve been criticized for this in the past as giving away my “secrets.” I laugh at this because there really are no secrets. Secrets usually mean some shortcut or quick fix to a problem that doesn’t require much effort. Most secrets are just incremental efficiency improvements.

My response to this charge is that it’s dangerous to be too far ahead. It’s a lot like running a long distance race. If you’re a good runner, it’s easy to separate yourself from the pack and if you aren’t careful, you’ll be too far ahead before you realiz you’ve missed a marker and you’re off course. By the time you realize you’re out of the race, you may not be able to recover.

Such is the case with innovation. Especially when it comes to technology. All those new cool gadgets and gizmos, all the new software and operating systems do no good if they aren’t reliable (meaning they work when you need them to work,) or there are other alternative innovations competing with them.

I’m not saying to stop innovating. That would be fundamentally wrong. What I am saying is to make sure the innovation is just slightly ahead of where the market currently is. If it’s an incremental improvement, pretty much everyone will “get it” and it becomes a no brainer to adopt.

It’s the truly innovative, industry changing innovations that are dangerous. Keep an eye out for who is adopting. Open a dialog with them. As long as you aren’t competitive in the same market, they’ll welcome your inquiries. You’ll give them someone else to commiserate with when the dang things break down or don’t work the way they’re supposed to.

For those with true innovations, the path is the same. Create a breadcrumb trail of steps toward the new innovation. The breadcrumbs are the small, babystep innovations that are the no brainers. Introduce them fairly quickly over a few months and you’ll have a much better chance of acceptance.

Adopting new ideas is a dangerous proposition. The inherent nature of people is to be risk averse. Change scares them. Business owners are especially prone to this. They don’t want to mess with something unless it’s broken. Why move ahead when we’re making money doing what we’re doing? That’s the subject of a whole new post.

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The Value of Small Business to the US

Tuesday, July 14th, 2009

Recently The President of the U.S. received a report entitled:

2009 - The Small Business Economy
A Report to the President

This is an annual report complied by the Office of Advocacy whose charge is to conduct and solicit research documenting the importance of entrepreneurship in the American economy and highlighting policy issues of relevance to small firms. This report contains some very interesting and informative facts. Among them small businesses in the U.S. provide about half of the nation’s private sector work force, and provide half of the nation’s nonfarm, private real gross domestic product (GDP), as well as a significant share of innovations.

In the introduction, the authors point out:

Small businesses were challenged in many ways during the year, with many struggling to make ends meet. Their top concerns in the middle of 2008 included poor sales and inflation; by year’s end, access to credit was a major concern. The nation’s job generators were forced to reevaluate their businesses, lay off workers, and postpone plans to grow their firms.

This is nothing new to any of us who are actually out in the trenches fighting the day-to-day battles. The report goes on to cite the current challenges faced by small firms, including access to capital, the cost and availability of health insurance, retaining a quality work force, global competition, and concerns about taxes, regulation, and federal procurement.

It was also noted small firms faced difficult challenges in the extremely distressed financial environment. The credit freeze in the short-term funding markets had a devastating effect on the economy and small firms. By late 2008, the normal production of goods and services had virtually stalled. While the first half of the year was largely un-effected by the changes in the financial sector, by the fourth quarter loans and credit to small businesses virtually stopped.

One of the most interesting observations was that small businesses can be divided into two groups, employers and nonemployers. The later would be single owner/family operations that do not employ outside workers. Overall, the researchers noted how the typical nonemployee firm and employer firm differ. The most immediately obvious difference is their size and number. Employers are larger operations, but nonemployers outnumber employer firms by a three-to-one ratio.

When it comes to the impact of foreign competition on small businesses several factors come into play. Small manufacturers, by the nature of their size, are less able to protect themselves from foreign competition than large manufacturers. Overall, the study fount that increased international pressures in the form of currency exchange rates lead to increased exit rates among very small manufacturers (those with fewer than 20 employees). Slightly bigger manufacturers (20-499 employees) are less sensitive to changing conditions.

While none of this is news to those in business, at least the President is now somewhat aware of the plight of small business. Whether anything can be done to improve the situation remains to be seen. The stimulus efforts to date have been weak at best.

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Managing Your Cash Flow Part 3

Monday, July 13th, 2009

Finding ways to improve your cash flow is a never ending job. When the economy is contracting like it is now, problems with the cash cycle show up quickly. The underlying weakness could have easily been masked by the flow of orders. As the order flow slows and sales stall, the real weaknesses begin to become apparent.

Before we get going on how to find more money from within the cash flow cycle, I want to make one very important point. If you aren’t currently accepting credit cards, get a Merchant Account and start today. You’ll see in a moment why this is very important. It solves some of the obvious and not so obvious problems you face.

There are two fundamentally different ways to improve your cash flow. The first is to find new sources of money from within your natural business cycle. The second is to borrow funds to inject into the cash cycle to keep it going. Let’s look at ways to get new funds from the natural business cycle.

Cash flow is all about timing and collection. The less time you have to wait for your money, the more you’ll have to work with and the less you’ll have to borrow. So, at the very beginning, get a customer deposit. At the very least enough to cover the material and labor costs. My personal rule of thumb is 50%, but I have seen the range go between 33% and 100% of the total order. You’ll need to be really aggressive to be able to get the client to prepay the order.

Make it clear the balance is owed on completion of the order. This C.O.D. approach is often received with reservation because your customer doesn’t want to give their cash up any faster than they have to either. The easy way around that is to have them put the balance on their credit card.

If they balk at that, you’ve just found some very interesting information. If they’ve maxed their credit card balance, how do you know they will be able to pay you? You’re not a bank, the credit cards are. There are a couple of key sentences you can use:

“We print t-shirts, we’re not a bank.” and

“The balance will be due when you pick up the order. You can pay with cash, check, or credit card. That won’t be a problem will it?”

Both of these messages are clear. You expect to be paid for your work and you’re not in a position to carry their balance. If they balk or beat around the bush, you have to decide if you want to go through the cash cycle and wait for you money.

Anolther way you can improve the situation is to RAISE your prices 5% - 7% and then offer a substantial cash discount for payment at time of delivery. You might say: we offer a 7% discount from the order with payment in advance, 5% discount with deposit and payment on delivery, and NET if we have to wait for payment.

By raising the price a substantial amount, there’s a huge incentive to get paid early. For me, taking a substantial front end discount is not that big of a problem because I can turn the cash cycle two, three, or more times in a month. So yes, I am giving up 5%, but I make at least 35% on each cash cycle.

It’s also important to make sure the invoice is completed and presented at the time the order is delivered. If the customer comes to pick up the job, and the invoice is ready, it’s much easier to get them to fork over the credit card or take out their checkbook. Afterall, they can’t pay the bill that’s due if they don’t know how much they owe.

This brings up another very obvious but often overlooked situation. Make sure the customer knows what your terms are and what you’re expecting from them. If they don’t know, they may expect you to bill them. If they give you some lame excuse like, “we only pay once a month,” give them a proforma invoice. This means “in advance of performance.”

Have them put the deposit on their credit card. They can pay the credit card bill at the end of the month.This is a very common approach to get the order into the cycle and once again helps you identify in advance any potential problems with getting paid. The more open you are at the beginning, the less chance of misunderstanding or delay at completion of the order.

You have a remarkable opportunity right now to ask for significant deposits in advance. Everyone has been hearing about the banking credit crisis. Any small business owner has either had their line of credit frozen or cut, or their interest rates on their credit cards have skyrocketed in advance of the new credit card limitations. With all the negative credit news, it’s easy to blame the situation on the bank. Make them the bad guys so it’s easier to collect from your customers.

At the other end of the process is the collection of invoices you’ve had to wait for. This is the Accounts Receivable collection period. Accountants will tell you to divide monthly Sales (revenue) by 21.6. This is the average number of billing days per month. This number then represents the average sales per day. Now take this number and divide it into your total Accounts Receivable amount. This gives you AR Days of Sale, or how long you wait for your money relative to how much you are selling per day. You want this number as low as possible. If your normal terms are Net 10, your AR Days of Sales should be very close to 10 or less. If it is more, it means your customers are not abiding to your payment terms.

AR Days of Sale is an indication of how efficient your Accounts Receivable collections are. In the next installment we’ll be talking about borrowing as a way to increase your cash flow. If you go this route, it will be important to have these numbers available so you’ll know how much to ask for and to let the banker know you have an understanding of the process and what your actual needs are.

It can be a bit tricky to figure this out. If you have some corporate accounts that absolutely insist on Net 30, they’ll skew the overall numbers. Retail is even worse. They want terms for everything. In other words, they want you to finance their business and take the risk your that your designs will sell.

My personal philosophy is that any small business needs to be on COD or Net 10 at the absolute outside. There’s no good argument in today’s economy for going longer. Blame it all on the the banks and your suppliers. What’s really going on here are you customers wanting you to lend YOUR working capital to their business. If you’re short on WC, it makes no sense to lend what little you have to others.

The argument for extended terms is you’ll lose the business if you don’t offer terms. This may be true, but if you run out of cash, damage your own credit, and can’t pay your vendors, landlord, etc., what difference does it make if you lose the order. Because you’re tight, you need to make absolutely sure you get paid on time for the work you do. The completion of the cash cycle is the only way you can get more capital to run your business, unless you borrow.

In the next installment, we’ll look at sources of borrowing to improve your cash flow. We’ll also look at how this can be empowering and limiting at the same time. In the meantime, here are your action steps:

1) Calculate your AR Days of Sale to determine what your collection period is now.

2) Formalize your business terms if you already haven’t done this. Make some signs or put together a term sheet you can give to your customers.

3) Get in the habit of telling the customer what the due balance is when you call to notify them the job is done. Better yet, fax the balance due invoice to them at the same time so there is no confusion when they come to pick up the job.

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