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Minding your Ps and Rs for Entrepreneurs
by Jean Knill
If you are an entrepreneur in a service industry or profession, you probably have to spend a lot of your own time providing or overseeing the service you offer. If you sell products after making or sourcing them, this core aspect of your business takes up many of your precious hours. But you could find yourself with lots of time on your hands if you don’t find a way to schedule in the minding of your Ps and Rs.
So what are these Ps and Rs? The P is for payments and the R for receipts. It’s another way of saying cashflow. Among businesses that fail, a lack of attention to cashflow is a major contributor. There are many aspects to cashflow, some more obvious than others. Most of them fit in the following categories.
Aspects to Consider for Payments
1. Work out your break-even figure. To do this, you need to be able to predict your outgoings. Many will be regular amounts and some must be estimated. With a good accounting system such as QuickBooks or Sage, this could be a relatively simple matter. You also need to add a contingency amount to allow for unforeseen expenses. How conservative you make this will depend on how risk-averse you are. It might be wise to consult your accountant.
2. Pay your taxes on time. Put that money aside before doing anything else. Develop a positive attitude to them so you recognize that, if you have a lot to pay, that’s good. It means that your business is doing well.
3. Keep your team loyal with a firm but even hand. Treat your staff fairly and avoid the extra expense of frequent recruitment, stress-related sick pay and replacing pilfered stock.
4. Keep your marketing budget down by looking after your customers. While it is important to keep on marketing throughout the good times, by far the cheapest way to stay in profit is by getting repeat orders from satisfied customers.
5. Keep in touch with your suppliers. When the economy is in the doldrums, we are all likely to go through bad patches, and if times do get tough, it’s easier to negotiate paying in installments if you have a good working relationship. Don’t leave out your contacts at the bank. Share your successes and concerns with them. Be open and honest so they never have any nasty surprises.
6. Avoid using credit cards as much as possible. Unless it is paid off each month, putting debt on credit cards is one of the most expensive ways to fund your business.
Now let’s look at the Rs, which are just as important. Without receipts you can’t do any paying out unless you draw on your reserves, supposing you have any. Have you noticed how many Ps and Rs there are in the word entrepreneur? If you get three times as much in receipts as you make in payments, your business will be a success.
Aspects to Consider for Receipts
1. Aim to top your break-even figure by an appropriate percentage each month. This target can grow as your business develops and becomes well established. Hold a regular review of how well your business is performing against this target and feed this information into your decision-making processes.
2. Set up a credit policy that means you do credit checks on potential new customers, unless they pay up-front. Also run a check when a current customer requests a limit raise. Never give credit you’re not comfortable with. Unless you are confident in this area, it could pay you to get professional help on putting this policy in place.
3. Set credit limits for each customer and review them at least annually, lowering them if you have any concerns.
4. Set payment terms and be ready to enforce them. Check if it is legal in your country of operation to make an additional percentage charge on late payments. This is a great incentive to your debtors to pay up on time.
5. Leave some leeway in your policy for a little flexibility with longterm customers who might hit a temporary rocky period. Keep up good working relationships and look after your loyal customers. Treat them as you would want to be treated by your own suppliers.
6. To enforce your credit policy, you need a credit control system and procedures in place. When payments are overdue, make reminder calls to your erring customers. Always be polite and point out the benefits to them of paying on time. Agree a schedule of installments if that seems the only way to get your money, and be wary of providing more goods or services before full payment is received. Attend to the most difficult cases yourself and trust your own judgment. Gut reactions are most often correct.
Every entrepreneur has to find ways of keeping tabs on these details as well as on the big picture. To some extent, you have to be a risk-taker. Keeping on top of your Ps and Rs will help you to understand the safest time to take the next jump into the unknown.
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