For his latest Business Advice article, Grid Law founder David Walker explains why small business owners putting too much in time and resources into marketing campaigns could be threatening the profitability of their firm.
Have you ever considered that increasing your marketing efforts could be fatal for your business?
Clearly, this is never the intended outcome of any marketing campaign, but it could easily be the end result. To find out if your business is at risk of suffering a similar fate, answer the following question.
When your cash flow is stretched to the limit because of slow-paying clients, what do you do first?
- Take positive action to address this problem and collect the money you’re owed?
- Focus on your marketing and winning new business to generate more income and make up the short fall?
If you, like many people I ask this question, answered “2”, your business could be in real trouble. This strategy rarely works and in most cases, it makes the situation worse.
Let me explain why.
We’ve all heard the expressions “cash is king” and “cash flow is the lifeblood of a business” – but have you ever stopped to think about what they really mean?
Cash is more important than profit. Without cash, a profitable business can be forced to close, but with cash, a business on its knees can be turned around. This is because you cannot spend profits. Profits are just a line on your accounts, a promise of cash and you never know if that promise will be fulfilled.
You can only spend cash. Without it, you can’t pay your staff, suppliers or other overheads. If you can’t pay your bills as they become due, your business is insolvent and may have to close.
Focusing on winning new business when you’re in this position may seem like the logical thing to do, and to start with it may seem like this strategy is working. As new work comes in, you get busier and busier and may even take on new staff and have to increase overheads just to cope with the demand.
The trouble is, if you haven’t addressed the underlying problem, your credit control system, you’re probably just going to end up with more clients who don’t pay on time.
When this happens, you work even harder but with higher overheads and less cash coming in. This cycle continues until the situation becomes unsustainable. Then, all of a sudden, you don’t have enough cash to pay your suppliers or to meet payroll and you’re left wondering what happened.
This is why you can’t trade your way out of a late payment problem.
So, what should you do instead?
As important as any marketing campaign is, it’s a waste of time if you’re not getting paid for the work you’re doing. Therefore, you need to focus on making your credit control procedures as efficient as possible. The first step towards this is making them a priority.
Make sure you’re invoicing your clients on time and then sending reminders when your invoices becomes overdue.
Also, never under estimate the power of picking up the phone. Making more collection calls is one of the most effective ways of recovering your unpaid invoices. For a step by step guide to making more effective collection calls, check out my previous article: How to get comfortable having awkward conversations.
If you need to, don’t be afraid to take legal action against your clients. For small claims (anything under £10,000) the procedure is very straight forward and it’s actually very rare that you get anywhere near a court room (approximately 97 per cent of disputes settle beforehand).
In my experience, the more prepared you are to go to court, the less likely it is that you will ever get there. To find out how to give yourself the best chance of getting paid, check out my previous article: How to settle a dispute before taking a case to court.
Challenging a slow paying customer can be daunting and many people fear losing the client. In reality, this rarely happens and if it does, just remember, you were going to find new clients anyway.
When you have an efficient credit control system you can then turn your efforts back to your marketing campaigns. This then becomes an activity to grow your business, rather than an activity which could finish it off.
If you have any questions about recovering your unpaid invoices, please feel free to email me at firstname.lastname@example.org and I’ll be happy to answer them for you.
Catch up on the rest of David Walker’s series covering marketing campaigns:
- How not to run a price promotion (and what to do instead)
- Promoting your business: The line between impact and illegality
- Direct electronic marketing: Obtaining consent to stay on the right side of the law
- How to run a successful (and legal) promotional prize draw
- How to avoid getting caught up in ambush marketing
Sign up to our newsletter to get the latest from Business Advice.