Rich Christiansen – Parallel Entrepreneur, Entrepreneurial Expert

With two cow pies under our belts (but hopefully not under our shoes!), we move to the third cow pie for small business: stability.

When it comes to stability, I’ve got another farming metaphor: don’t take a one-horse show on the road. You are extremely vulnerable when you have all your eggs in one basket. (Okay, that was two farming metaphors). It’s great to have an initial big-name customer; in fact, you can and should use that to build credibility with other potential clients. The same goes for a customer that buys lots of your product; once you have them, go out and get ten more. Don’t let losing one account make you lose your business.

During the early stages of our endeavor, Ron and I landed a large New York City music label. This was a big deal for our budding venture. We celebrated at a nice restaurant in Time Square. A couple of bumpkins from way out West had scored a Big Apple icon as a client! The deal was penned for a six-month term. Six months may not be long, but our client was big, and it would have been easy to coast for a little while.

What I have learned is that when you get a lucky break like that, it’s fortune’s way of giving you time to set up for your next one. It’s okay to celebrate your newfound breathing space—in fact, I’d encourage it. You’ve done well. You deserve a pat on the back and a nice dinner. Just don’t go for six months of back-patting and dining out. While income from the big client is driving your business, you have time and money to gain more clients, large and small. For Ron and me, in the six months that followed we went and got more business. When this contract came to a close, we didn’t worry about the financial viability of our company. We had several clients in place, and were safely out of the pasture without stepping in anything messy.

Just as important as the number of customers is their diversity. When this deal ended, we had toeholds in a number of other viable arenas. I’ve been in situations in the past, however, where one company or one market was my primary source of revenue.

I remember a sad happening between Google and me: one day, Google decided to up and change how it managed its organic traffic. And when Google rewrote a simple algorithm, it completely killed my business. With that one tweak of a little line of code, my venture was sunk. As a matter of fact, I’ve seen some reports that Google’s “Florida Update” drove somewhere around 30,000 small businesses into the ground with that algorithm change. Products hadn’t been diversified, and a whole wing of the market collapsed.

Securing a diversity of suppliers is likewise critical. You can rest assured that if one of your suppliers steps into the sort of unstable cow pie that you are avoiding, you will be left unsupplied. If you can get one product or service from several different sources (without exorbitant costs), try it. If a mismanaged client base is like stepping in a cow pie, your major supplier’s downfall can be like kicking your feet out from under yourself and landing hard in the mess. You’ll stand up from the field dirty and smelly if you don’t have backup plans in place.

Porter’s Points – Stability

• When that big customer puts pen to paper on the dotted line, celebrate! Your venture has been validated! Now get back to work.
• Diversify and expand your clientele. See how many niches your product applies to, and get as many customers from each as you can. If one wing of the market takes a hit, you should still be able to fly because of the customer base you’ve built.
• Your suppliers are running a business just like you—but perhaps unlike you, they may have not taken a good look at the pasture lately. Don’t count on all your supplies coming through one route. If one of your suppliers hits a cow pie, things could start to stink for you. Diversify and expand suppliers.

Next time we’ll talk about the last cow pie Rich and Ron address in Bootstrap Business – the necessity of continually assessing your environment.

Tweet This Post 

The second cow pie for entrepreneurs is death by net.

If you’re going to bootstrap a business, you need to internalize this irrefutable truth: nobody cares about your money like you care about your money. Nobody! That’s why you track your cash flow daily, and why you must also articulate and enforce your net due policy. A net due policy has to do with when your clients’ payments fall due.

Generally, businesses do not expect the complete fee for their service before starting work. Some ask for net-60, net-30, or even sooner terms—that is, they require their clients to pay the full balance within 30 or 60 days of the invoice. Articulating your policy is important—“net terms” could mean anywhere from seven days to sixty. Enforcing your policy is crucial—just because you say you have a two-week net due policy doesn’t mean that everyone will pay in two weeks.

Your net due policy determines the promptness and amount of your accounts receivable. This is vital; accounts receivable, after all, are the flow to your cash. You must have cash coming in—and you must know when, where, and how much—because otherwise, you will only have cash going out. If you aren’t careful with your approach to your net terms, you will experience leakage. Leakage is bad. In cows, it makes for an extra mess. In business—well, you get the picture.

I have sometimes had large companies as clients that have systematically tried to get out of paying their bills, particularly those submitted by smaller vendors. They would purposely delay payments for 30 days, or even 60. Why? Because these companies had discovered that if they held off payment long enough, the smaller businesses would either lose track of the payment or else just tire of the continual ankle biting in the money chase. They could usually trust small business owners to forget about the invoice altogether—or just give up on collecting it. For you, then, the moral is clear: don’t let anybody bully you into losing track of your receivables—and don’t lose track of them yourself!

A second angle on this cow pie: if the money isn’t in the bank, it isn’t in your pocket. Once you’ve trained yourself or your multipurpose first hire to think in terms of cash flow, it’s really exciting to go into QuickBooks and see that you’ve got a huge balance. That definitely ups your confidence—as does writing your checks out of QuickBooks and seeing that there’s money there to cover them.

Confidence usually deflates at the next realization, though: QuickBooks is not the bank. Even if you have pending payments showing up as assets in your balance sheet, it’s not real money until the bank says so. Actual money needs to come in.

A firm net due policy will help both of these issues. What kinds of terms do you give for payment? Do you allow 45 days? 30 days? 15 days? I always submit seven-day terms. Sometimes they stick, and sometimes they get bumped to 15 or 30 days—but I never permit a company to take more time than that to send me my payment.

When I sit down to my QuickBooks, it is usually a very close representation of what is in the bank. Many small-scale businesspeople will allow longer terms so that they can charge a more expensive rate. Getting paid big amounts is nice, but if your accounts receivable start to lag, it means that your vendors get a bite out of you before you even sit down to eat at the buffet they are supposed to be providing. The speed of your pay is every bit as important as the amount. As with anything else, you have to strike a balance, and I far prefer to get paid quickly especially in the tender stages of the venture.

Short-range net terms are good, but what if you have a particularly stubborn customer? Having seen many small businesses die because some accounts receivable were never collected, I have established a “collection escalation path.” Most of the time it works, and the method only involves a simple conversation. My partner or employee brings up the topic first, as the deal is being settled. It goes something like this:

“You’re going to love working with Rich—he’s a savvy businessman, good at what he does, and for the most part easy to talk to. But the one place you don’t want to go with him is late payments. If you don’t pay on time, and Rich gets wind of it—well, no one wants to be in the building when he makes that call. I’ve overheard a few, and they can get ugly. Very ugly! Whatever you do, don’t be late with a payment—but if you’re always on time, you’ll never get better work done than what he will do for you.”

Do they make me sound a little like a Mafia boss? No, because I’m a really nice guy—I’m just a nice guy who wants to be paid on time, according to policy. I’ve seen this work with small and large companies alike.

If the payment is a day late, have your administrative assistant place a call. Giving the company the benefit of the doubt will sometimes result in an immediate payment. If the company gets to be a week late, have the accounts receivable manager place a call. Have the person make a statement to this effect: “Your account is going to show up on Rich’s report. He’s going to see this shortly, and we need to get it resolved or you’re going to get a call and, let me assure you, you don’t want that call from Rich.”

Nine times out of ten that solves the problem. If for some reason it doesn’t, all I have to do is place a phone call, even just leave a voice message, and say: “Hey, this is Rich. I’m really concerned about the finances here.” After all of the suspense that has been built up, a simple call like that is usually enough to get the people owing me money to take care of the situation. It is remarkably effective for collecting receivables on time.

No amount of accounts receivable, though, is any good unless you have a plan behind it that you are committed to follow. The questions that you ask while constructing your net due policy are also good for checking up on yourself later on. Some of these questions are: what is the state of my accounts receivable? What is my net due policy? How about my suppliers—thirty days net? Sixty? How do those all affect each other? When do expenses fall due? Will I have enough revenue flowing in at the right time for that? How about rent and utilities—when are they due and how much are they? How often do I need to pay insurance and taxes?

If you don’t have answers to these questions before you start, get some. You don’t want to empty yourself of cash at the beginning of the month, waiting around for your net-30s or net-60s to kick in.

Later on in your venture, if your plan doesn’t line up when you check up on it, look at your feet! You’re still walking through the pasture and might end up on the squishy ground of lagging accounts receivable. Create a calendar to organize your payments or have your miracle first hire help you out. Get and keep a visual of how all the financial pieces fit.

While we’re on the topic of your money as it relates to your clients, be careful about who you extend credit to. It can be tempting to be liberal with credit in hopes that extending it will somehow come around and benefit you on the upside. While money is definitely a method for friend-making in the business world, foolishness with money is great for bankruptcy-making. Be smart about to whom and how much you extend credit, and be sure to keep accurate records. Secure yourself first. Do background checks on anyone you give credit terms to and always follow up. Bring out the big, bad Rich if you have to. You can’t be too careful with your credit.

Whatever the financial scenario, if your money goes out, make sure you bring it back in. Don’t let your services go unpaid and don’t be afraid to be blunt about it. If you don’t care about your money, nobody will—at least, they won’t care about getting it back to you.

Porter’s Points – Death by Net
• Avoid spending money you don’t have yet. Part of avoiding death by net is checking your cash flow—and checking it against your actual bank balances.
• Net terms need to be set so payment comes as scheduled. Firmly back up the terms of your client agreements, and be prompt, friendly, and effective in providing your services. They want you on the job. Give them what they pay for—and don’t let them delay paying you.
• Credit can do great things for your business relationships, unless it runs away from you unchecked. Keep a tight lid on who you loan to.

Now we’ve covered the first two cow pies for small businesses: cash flow and death by net. Next time we’ll talk about the stability cow pie.

Tweet This Post