Most people start a business because they love what they do, not because they just happen to love managing businesses.
But the plain truth is you can’t expect to stay in business or be able to pay yourself at the end of the month if you don’t pay careful attention to when and from where the cash comes.
Here are three simple hacks to help you get ahead of the business curve.
Smooth out the Feast and Famine Cycle with Recurring Revenue
Some businesses manage to tap into steady, reliable demand from the get-go. Others, however, can go through extreme highs and similarly extreme lows throughout a given year. This is the phenomenon known as famine and feast. It basically works like this:
- All your time goes into sales because you haven’t got much work on.
- Suddenly all sales work pay off and you’re busy doing the work and getting paid (FEAST!).
- But while you’re busy doing all that work, no one is focused on sales.
- Suddenly, all that work is finished and there is no more money coming in on the horizon (FAMINE!).
- So all your effort now goes back into getting new sales.
Unfortunately for some businesses this cycle of feast to famine and back again never ends. This is even more pronounced if you’re at the stage where you don’t have a dedicated sales or business development person and you’re stuck doing all the sales work along with all the production work.
The best way of smoothing out the peaks and valleys in the feast and famine cycle is to spend a portion of your sales time generating recurring income. These are sales that you know your customer is going to automatically pay every month.
If you run a web design company, for example, the obvious source of recurring revenue is from hosting client websites – especially since you can now purchase a cheap virtual private server (VPS) capable of handling tens if not hundreds of clients.
The best part about recurring revenue? It only increases over time. A customer of ours, Microwebsites, has 95% of their customers on a monthly hosting plan. Over the course of four years in business, they have built close to $4,000 a month of recurring revenue. The owner could literally take a year off and still do OK financially.
Never Submit Rounded Numbers on a Proposal
I learned this hack through trial and error when I was running a web design and development business in the early 2000s.
If we submitted a quote or a proposal to a customer and it included whole round numbers, it was more likely that the customer would try to negotiate down on price. However, if we submitted a proposal with a number that was precise to the dollar customers very rarely tried to negotiate down.
Think of it like this: if you see a proposal from a supplier and it says $10,000, your immediate response is to question the figure as it is so rare for a quote to come up at perfectly round numbers. As a customer, you’re going to immediately think there is some wriggle room there.
If you see that same quote for $10,214, however, psychologically you feel that that is a more honest and accurate proposal. Plus, if this is your quote, you’ve also just collected an extra $214, which is far better than having to negotiate down on price.
This obviously won’t work with all clients, all the time, but when it does, it only strengthens your bottom line.
Sometimes the Most Profitable Project Is the One You Say No To
Not all projects go smoothly and not all clients are built the same. From time to time you will most definitely come across a project with an obviously creeping scope or a client that gives you that sinking feeling in the pit of your stomach.
And even though the project or client may come with big dollar amounts attached, you need to be careful and assess the risk that it could all go belly up.
In a web development firm I once managed, we had the opportunity to pitch for a large platform that allowed individuals to sign up and create personalised psychometric profiles for potential employees.
The scope from the client was rather impractical, and the owner of that business actually asked where I lived so that if anything went wrong he could make sure I would see “the whites of his eyes as he stood at my doorway screaming.”
That alone should have been a massive warning sign, but the revenues were going to be big. We justified it by saying that we really needed the project to cover cash flow and that it would lead to future opportunities with this company.
Unfortunately, the project was a disaster. We didn’t even get close to covering costs. What’s worse is that everyone spent six months stressed out of their minds. Thinking back, we all knew it would turn out like this, but hindsight doesn’t help.
Now let’s consider what would have happened if we had said no to this project. We would not have lost money on the project and the team would have been able to focus on doing better work for our better customers.
This doesn’t even take opportunity cost into account. Instead of flogging a losing project, we could have spent that time finding new and better business – an activity that we still had to do even after we finished the project.
Considering all this, if we had just said “No” to this project, it would probably have been one of the most profitable projects we (never) took on all year.
Little hacks can add up to big improvements
The trick to successfully running your own business is to know all the ins and outs — from marketing to actual production — so you don’t get blindsided by sudden problems and issues. These three tips are just little hacks that I’ve learned (and, more often than not, forced to learn) in the years I’ve spent running several businesses. Follow them and you might be saved from the massive headaches I once ran into.
The feast and famine cycle is one we used to be on until we expanded a bit. This let us have one person focus (mostly) on sales and marketing, while the rest of us do the development work. Flattens that cycle out a bit.
Point 3 is also important. But what we done for projects we find risky is to make sure we have a) enough of a buffer to ensure that we don’t lose money and b) that the contract is clear and concise so that we can’t get railroaded.
I think feast or famine is avoidable if you have a dedicated sales staff. It becomes much harder to avoid if the same people selling are those managing the projects when a new client signs on. Also, I would add that another easy pitfall to avoid is trying to be everything to everyone – and always saying yes. Know your core competency as an organization, and strive to make customers successful using it. Customers often want us to step outside that zone, but when we do, it usually ends up being painful for the organization.