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Last Update: Friday December 15, 2017

Key Idea: Set Profit Margin Goals

Host Hattie Bryant says that increasing sales won't necessarily increase profits.

Key Question:

A: 

Don't assume that all sales are equal.

Laurie's customers are basically retailers. She has some direct sales from her catalog, but, this is a very small percentage of her business. Retailers are not all equal. She started her business with the specialty shops and today she could sell to the mass merchandisers such as Wal-Mart or Costco, but, if she does that, her profits will erode because they want to buy at such reduced prices her margins evaporate.

She could find a way to make the products for less, but, she is committed to the quality she achieves by keeping the entire production process in the U.S. If she let the manufacturing go off-shore, she is convinced that the quality would drop and competitive pressures on her shops would be too great. If that quality drops with the prices required for mass distribution, her specialty shops will stop ordering products.

Rather than put these relationships in danger, she has decided not sell through mass merchandisers.

Q:
  What is one business process Laurie does better than others because she does it different?

A: Collections. Most manufacturers won't ship to a shop owner who has bad credit, but, Laurie finds ways to do business with people who have bad credit. She gets them to pay with a credit card; she holds checks; she ships C.O.D. Her sister works closely with all of the questionable accounts and collections are made. Laurie is making sales to retailers others refuse to work with. Everyone wins because the shop owner gets Laurie's unique high qualtiy products; Laurie gets distribution; and the kids get the great hats and clothing.

Laurie is also creative when it comes to collecting from her big customers. Early on in her relation with them, she was able to get a 50% advance payment from a big customer . This upfront cash is critical to her ability to get the product manufactured.. Customers want you to succeed and will work with you if you demonstrate your good faith by achieving deadlines. Also, notice that Laurie only used her credit card to finance short term production costs and she fully anticipated not carrying that debt beyond 30 days. Never carry credit card debt. Period. No further discussion.

Managing cash flow from operations is important.   Any amount  of cash will go further if you can get cash into the company quicker and postpone disbursing funds from the business.

Q:
How does a small business owner manage cash flow from operations to his or her advantage?

A:
In addition to the money you put into the business, debt financing and equity financing, there's cash flow from operations. Primarily, this consists of cash receipts from sales, generally the collection of receivables, and cash disbursements related to inventory and other accounts payable purchases and, of course, payroll. Let's look at cash management strategies for each of these:

Cash Receipts from Sales

If you are not in a business where your customers pay cash for goods and/or services received, then you will have accounts receivable. The sooner your customers pay their bills, the better your cash flow. To encourage them to pay promptly:

  • Collect advance deposits on sales if possible.
  • Get your invoices in the mail quickly, preferably delivered with the goods and/or services.
  • Offer a small discount to customers who pay the invoice substantially before it's due. Put this clearly on your invoice, e.g., "2 10, Net 30" means the customer can take a 2% discount if (s)he pays in 10 days, otherwise payment is due in 30 days.
  • Charge interest on amounts not paid on time, i.e., according to the terms of the invoice. Prominently display the interest rate and terms on your invoice.
  • Call each customer on THE day that his or her invoice is past due.
  • Mail monthly statements summarizing outstanding invoices.  Most accounting software packages used today have this capability. Most importantly, minimize your bad debts.
  • Get credit references and do credit checks on all new customers. Monitor your accounts receivable aging daily and stop shipping or serving problem accounts until collection issues are resolved.


Inventory Purchases and Other Accounts Payable Items Here, our strategy shifts. While we do everything we can to accelerate the flow of cash into our businesses, once it is there, we do all we can to hold onto it as long as possible. Don't cross the line of affecting your credit rating or vendor relationships, but walk right up to it. Here are some specific things you can do:

Practice JIT inventory control.
JIT stands for "just in time". Order what you need to be available when you need it, but don't stockpile goods. Inventory investments tie up MOM.
Ask your vendors for extended terms. Tell him you are starting a new business and you could build it up faster if you could match your payments to the vendor with your collections from your customers. Take the time to explain your business to your vendor and then ask for terms of 30 days more than your normal collection cycle. In other words, if most of your customers pay in 45 days, then ask for 75 days. Remember, your vendors are like you, they are looking for new quality customers. And who can better sell the idea of your business' promise than you?


Deposit your funds locally and then arrange to have them transferred at the end of each day to an out-of-town bank. Write your checks on the out-of-town bank. This usually gains you about three days of "float" where the vendor records your payment before the funds are actually available to him or her. Writing a check without the funds to back it up is against the law and we are certainly not advocating anything illegal but good cash management systems take advantage of the float.


Payroll If you are one of those rare small businesses who have started your business with employees, you have special considerations.

Meeting payroll is one of the biggest responsibilities and expenses of most businesses. You do have to pay your people and you certainly have to deposit your payroll taxes on time. Still, there are some cash management opportunities here.

Outside payroll services and staff leasing companies provide a wonderful service to small businesses. In addition to handling all the required filings, they offer the opportunity to procure certain employee benefits, such as workmen's compensation insurance, at reduced rates since you are purchasing as part of a large pool. But these services may be a luxury you cannot afford in the early years. In addition to the cost of the service, because the payroll service company is writing the paychecks for your employees on their account, they'll require that you fund that account several days in advance to ensure the funds are available as they process the payroll. They also draft the payroll taxes from your bank account, including the employer portion of social security, as the payroll as processed.

In fact, you are required to remit payroll taxes, those withheld from your employees and the portion the employer pays, at varying times based on the size of your payroll. The smaller the company, the more the deposit can be delayed. You can research the statutory requirements in your State on the Internet. The point we are making here is there are cash management opportunities in processing your own payroll.

Think about it

Do you know what your profit margin is on each specific job or project?  Do you turn down work that won't create enough profit?  Do you make the most of your cash?

Clip from: Flap Happy started by manufacturing hats!

Hattie encourages us all,  "Set Profit-Margin Goals."

Santa Monica: In this episode of the television show we take you inside a California business that is making children's hats for Talbots, Nordstrom, Children's Wear Digest and dozens of others. Now they make hundreds of items for retailers (mostly small children's specialty retailers) all around the world.

Laurie Snyder started Flap Happy because she was afraid her very fair-skinned, freckled-faced baby boy would get seriously burned by the California sun. Laurie created a hat by enlarging the brim of a traditional baseball cap and by adding flaps. Other mothers saw the hat and wanted one for their own child.  That was the beginning of this special business.

Meet Laurie Snyder. Meet her Mom, her Dad, her husband, her sister, her "model" child and her other children, too. This is the team that sacrificed to build the business.

Go to all the Key Ideas and video of this episode...

Flap Happy, Inc.

Laurie Snyder, Founder / CEO

2330 Michigan Avenue
Santa Monica, CA 90404
310-453-3527

Visit our web site: http://www.flaphappy.com

Office: 310-453-3527

Business Classification:
Retail

Year Founded: 1987

Set Profit Margin Goals

We are very picky about who we actually give credit to. We are not afraid to say no to an order if the customer isn't willing to do things the way we need them to do it. We're extremely creative about the way we let people pay us. If someone does not have good credit, we take credit cards; we can have them prepay their order; we sometimes have them take it COD and we'll hold their check for 30 days. We have all kinds of ideas. And so that helps us get as many orders as possible.

HATTIE: OK. Let me get to some truth here and that is what you're saying is by being non-conventional you're more successful than people who do similar work in a conventional way.

LAURIE: Right.

HATTIE: Did you develop the system you're using now?

LAURIE: It mostly was developed by my sister.

AMY: We're very strict to whom we extend credit to. We're very picky.

(on the telephone)"I was calling regarding an invoice we shipped to you back on September 6th."

And, we stay on top of it. We're constantly calling people.

LAURIE: I've made a decision about sales. My number one goal is not how much money there are in sales but how much the profit is. And in order to stay profitable, I have to very carefully pay attention to who I sell to. If I sell to mass merchandisers, the specialty stores aren't going to want to buy our product anymore because they want something that's special and something that's unique.

We've made a major decision to keep our production in the United States and so we end up with a quality product that we have a lot of control over. Control over the quality as well as its delivery time.

HATTIE: (In the studio) Increasing sales won't necessarily increase profits. We have heard this many times. At Auntie Anne's Pretzel's we heard some of their people talk about how they had to slow the sales. They had to put the brakes on in order to install better systems. Laurie has put on the brakes, too. She has made decisions to support her goal to increase profits.

If Laurie takes her production to China, she risks alienating her current customer base which includes specialty shops and boutiques and her even her biggest customers, who are doing business with her because of her extraordinary quality. If the manufacturing were in China, she could feel the fabric and the quality of the stitching. And, why would she risk her core business with specialty shops to do business with the discount retailers? She has learned to say no to the discount merchandisers in order to keep that core business. She insists on a quality product and quality disribution. Laurie has learned to say no to some sales because increasing sales is not her primary goal. Her primary goal is to increase profitability.

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