best purchasing practices

Surviving the Next Recession


 

 Photo by Nicola Barts

 

By
Jim Hingst

 Jim Hingst is a contributing writer for Sign Builder Illustrated magazine.

The
economy is continually expanding and contracting. In fact, since the end of
World War II, the United States has experienced a dozen recessions. Whether you
believe that we are in a recession or not, you can be sure of one thing: an
economic downturn will come.  What’s
important is that your business is prepared. As Shakespeare expressed “…if
it be not now, yet it will come; the readiness is all.”
  

  

Effective
Cash Management.
More than 80% of businesses fail not because
their sales are unsatisfactory and not because their jobs are unprofitable.
Rather they have not appropriately controlled their cash flow. In a nutshell, a
negative cash flow is when your company spends money faster than you can make
it within a given period. The result is that you don’t have the funds to pay
your bills on time; neither the banks nor your suppliers will extend you
anymore credit; and ignominiously you go out of business – “not with a bang,
but with a whimper.”

 

Effective cash flow
management is an ongoing juggling exercise balancing money coming into your business
with the flow of money leaving your business. Assiduous maintenance and weekly
review of key financial reports will provide you will a clear picture of how
your money is being spent which can help control spending. Accurate records
also ensure that you are paying your bills on time so you don’t incur
penalties.
Knowing where you stand
financially is critical when making financial decisions, such as investing in
new equipment.

 

Once you create these
reports, updating them will not take much of your time if you do it weekly.
Some of the key reports you may need include:

 

Accounts
Payable
. One way that your company can get in trouble is not
posting invoices as soon as a bill comes in. Review your payables every week so
you track how much cash is outgoing.

 

Rolling Sales Forecast. To ensure a healthy
supply of incoming cash you should maintain a rolling sales forecast. A
forecast also helps track sales trends compared to your historical sales
records. What’s more, this report not only signals a decline in the economy but
you can use it as a coaching tool to focus the efforts of your sales team.

 

Accounts Receivable Aging Report. If you extend credit to
your customers, you need to develop and update an aging report for receivables.
This aging report lists outstanding
receivables according to how long an invoice has been outstanding and the
unpaid balance. This report is indispensable for anyone charged with the
unenviable task of collecting money. Moreover, it helps you assess your shop’s
financial status.

 

Cash Flow Forecast. Just as
you should have a rolling sales forecast, you should develop and maintain a
rolling forecast for cash flow. You can build your annual cash flow forecasting
model in Excel.  This rolling forecast projects
cash into the business from sales and loans as well as estimates for cash out of
the business which includes fixed operating expenses, loan repayments and a computation
for cost of sales (raw materials.) With approximations for cash coming in and
cash going out you will have a good guesstimate of monthly closing balances.


Deposits. To improve your
cash flow, get deposits on all orders to cover your raw material, raw labor and
other direct expenses, especially on large orders. Many shops require 50% down
on all orders.

 

By offering flexible payment terms you not only make it
easier for customers to do business with you, but you also ensure faster
payment if you need to extend credit.

 

Improving
Collections.
If
you have extended credit to any of your customers, they are much less likely to
pay promptly during challenging times. Prior to offering terms, always check
the client’s credit rating and make sure that you explain your expectations on
payment.

 

Make sure that you send out invoices immediately after
completing the job. This helps speed up collections. Another effective practice
to accelerate payments is to offer an early payment discount.

 

At the time your customer gives you the approval for the order, take
the time to review the terms of the sale. Do they understand the terms and do
they agree to them. When you work with a large customer, make sure to ask to
whom the invoice should be sent. Is it the person who signs the contract or
should you send it to a specific person in Accounts Payable.

 

If you need to deal with a specific person in accounting, it helps to
develop a relationship with that person. 
In the customer’s file, you should note whether he or she has a history
of paying late. Some people will hold on to invoices, especially during an
economic slowdown, until you call them. Before the due date, consider sending
them a friendly reminder.

 

When you call, politely request the reason for the slow payment. Was
there a problem with the order or the invoice? What can you do to speed up the
payment process?

 

Making collection calls requires a very special talent. After you
assign this responsibility to the right person, institute a schedule for calling
customers. This plan could include calling customers a week before payment is
due asking if they are satisfied with their graphics.

 

If payment is delayed, your collections person needs to follow up
inquiring about the reason for the delay. Then get an agreement regarding when
they promise to pay within a certain period. If the customer fails to keep his
promises, you need to follow up immediately.

 

Build
Your Cash Reserves.
In a recession,
the health of a company’s cash position is often precarious. Cash position
simply denotes how much cash that your shop has on hand at any specific point
in time. This comprises the current amount of money that you have in the bank
as well as your receivables and any liquid 
assets that you can quickly turn into cash if
conditions require.

 

Securing
Lines of Credit.
Before an economic downturn impacts your
business, prepare for the worst-case scenario. What are your options if you run
into cash flow problems? In planning for the possibility of a cash shortage,
you need to meet with the bankers where you have your company bank accounts
because you already have a relationship there. 
Discuss with your banker the various lines of credit that are available
to your business.

 

Ask
your banker what steps do you need to take to qualify for additional lines of
credit and how much can you get. What type of documents are required for loan
approval? How long does the process take? If you already have a line of credit
with a bank, see if you can have the credit limit extended.

 

Investigate
the advantages and disadvantages for each line of credit option. These options
could cover secured and unsecured business lines of credit, home equity line of
credit, credit cards and checking line of credit. Secure these lines of credit
before you need them. In the event that you need them, a line of credit can
help you meet your debt obligations or make payroll.

 

Best
Purchasing Practices.
With an eye for lowering shop costs, you
should review your purchasing practices. To that end here are some suggestions:

• Reassess the
purchasing authority in your shop (in other words, who can and cannot make a
buying decision);

• Get bids on
everything you buy;

• Only buy what is
absolutely necessary (for example,
if everyone in your shop has a cell
phone, do you really need a landline? Probably not)
;

• Consider buying
used furniture and equipment;

• When you need new
equipment, consider leasing versus purchasing;

Before the economic downturn affects your
business, start negotiating with your distributors for more flexible payment
terms.
During an
economic decline you may also have an opportunity to renegotiate equipment
leasing terms. 

 

Better
Inventory Management.
Inventory management is
especially important in a recession because the more inventory you have, the
more your cash is tied up. That’s cash that you may need in a crunch for
financial obligations, such as paying the rent or making payroll.

 

Whether we are in good times or bad, it always a sound business
practice to reduce your stock of raw materials to the bare minimum. When you
order material and supplies, make a resolute effort to order less but more
frequently. That’s the essence of a just-in-time inventory management strategy.
It requires forming a strong relationship with good distributors, who maintain
a sufficient inventory so you don’t need to.

 

Of course, you still need a stock of the essentials. Other than that,
you should order materials and supplies to fulfill the needs of individual
jobs. How to best manage your inventory is a conversation that you should have
with your distributor.

 

By stocking a varied and ample range of raw materials and
providing fast delivery, distributors can help shops reduce their inventory. In
other words, distributors carry the inventory so you don’t need to which helps
free up your cash. What’s more, by extending credit they can ease the financial
burden on shop owners.

 

Buying
in Bulk.
In some cases, you can reduce your raw material costs
buying in bulk. For example, printers may want to buy a commonly used film for
stock. While this can save money, taken to excess you can tie up your cash. You
need to decide which items make sense to purchase in bulk and which do not.

 

The Leasing Alternative. Another way to help maintain a positive cash flow is to
lease equipment rather than an outright purchase. Rather than making a
commitment in a new technology, you should also consider farming out work to
another graphics provider, that does not compete in your market, until the
economy rebounds or you have built a sufficient base of business and a positive
cash flow to support a new equipment investment.

 

Improvements in Operations. Analyze the productivity of your shop. One of the best ways
to gauge efficiency is to compare actual costs on select jobs with the
estimates. Any discrepancies between estimated direct costs and actual can be a
red flag for problems in costing or production. The same goes for variances in
cycle time, scrap rate and returns and allowances. To quantify the efficiency
of your shop you should establish key performance indicators for all aspects of
job production. Using this information, you can correct deficiencies and save
money.

 

Protecting
Your Best Employees.
Finding and training good employees takes
time and money. If you have an unhealthy work environment, your best employees
will be the first to find work elsewhere, leaving you with the mediocre ones.
While you probably should lay off anyone whose work is marginal or anyone who
is nonessential, you should nurture the talents of your best workers.   Keep in mind that if you have a toxic work
environment the word gets around town very quickly.

 

Independent Contractors.
Hiring someone full-time is often expensive, especially when you factor in the
cost of benefits. While you can control the time and behavior of a direct
employee, contracting with a freelancer may be more cost effective. Independent
sales reps, who work on straight commission, often generate a higher volume of
business at a much lower initial cost. The hourly cost of a marketing or IT
professional is usually higher than a direct hire, however, you are only
charged for the time and materials to complete specific assignments.

 

Protect
Your Business Base.
If you apply the Pareto principle to your
business you might discover that 80% of your sales come from 20% of your
customers.

 

If a
group of key customers represent the bulk of your revenues, concentrate your
sales efforts on keeping them happy. As
Andrew Carnegie
said,
 “put all
your eggs in one basket, and then watch that basket.”
Institute a practice of calling these key
accounts at least once a month, making sure that they are happy with your
services. Better yet, meet with these customers face to face over a meal. If a
customer is satisfied with the way you handle his account, don’t be afraid to
ask for a referral. 

 

Probe for Additional Opportunities. Make the most of your existing business relationships. If
you are selling a customer fleet graphics, make sure that you explore his other
graphics needs. A manufacturer may need safety signage. A client with a
warehouse may need aisle signage. Fleet graphics customers that exhibit in
tradeshows may need a new tradeshow booth or posters and banners.

 

When
you call your key customers, remember the maxim: “God gave you two ears and one
mouth, use them is that proportion.” In a conversation with a client, ask open
ended questions to allow them to talk about their needs and problems. Once they
reveal their pain points, you have an opportunity to provide solutions that
will end their difficulty and distress.

 

Invest
in Marketing.
In a recession, many shops reduce their
investment in marketing. That’s one of the worst decisions that you could make.
Instead of waiting for customers to walk through your doors, it’s time to be
proactive.

 

Being proactive, however, should not
carry a big price tag. 
Low-cost guerilla marketing alternatives to traditional
advertising include phone prospecting, direct mail, networking, email marketing
and developing a presence on social media platforms.

 

Phone
Prospecting.
Initiate an ongoing telemarketing campaign calling your
customers and prospects. The objective is to protect your business base; probe
for new opportunities; identify changes within an account; and detect threats
from competitors. If you are currently selling a customer fleet graphics, what
else could your sell them, such as tradeshow posters, plant safety signage or
store graphics.

 

Follow
Up on Old Sales Leads.
Just because you missed an opportunity in the past
is no reason to give up. Most sales are not made until after the fifth sales
attempt.

 

Direct
Mail.
Combining direct mail, along with phone prospecting and email
marketing can improve your chances of a sale. You can build your direct mail
package around a successful graphics program, a customer testimonial or a new
capability or services which your shop has introduced. Within a few days after
mailing, follow up with a phone call, which can dramatically improve your
response rate.

 

Networking.
Continue to build relationships with other business people in your community.
For example, if you regularly eat out for breakfast, invite a truck leasing
sales person to join you. If you sell fleet graphics, these people usually know
when someone is getting new equipment long before you ever will.   

 

Email Marketing. Periodic email blasts to your customers
and prospects serve many marketing objectives. These include building an
awareness of your products and services. Newsletters can also establish your
company as an authority in corporate graphics. The key to successful digital
strategy is to provide value to your audience, in other words, news that the
reader can use.

 

 

Strategic
Alliances.
As you head into a recession, you should not take on new
debt or hire new employees to expand your manufacturing capacity. As an
alternative, form a strategic alliance with another shop that does not compete
with you in your marketplace but has a capability that you don’t. Such an
alliance may require a formal agreement drafted by an attorney. If you are
sharing customer information with another graphics provider, your agreement
should include a non-disclosure agreement. Otherwise, your partner may become
your competitor down the road.  For
example, you can partner with a large format printer.

 

Costing and Pricing. During an inflationary period, you need
to continually update your costing standards to adjust for increases in raw
material and labor. While you certainly don’t want rising costs to erode your
bottom line, in times of high inflation you have an opportunity to test new
pricing strategies thereby increasing your profit margin. If you have a
reputation as the leading graphics company in your market, take the lead in
gradually increasing your prices until you start to lose business. That way,
you don’t leave any money on the table. In many cases, as you raise your
prices, your competitors will take notice and follow suit.

 

When the economic downturn hits, try
different approaches to closing deals. For example, you could offer to sell 25
sets of fleet markings for the 50-set price if the customer commits to buying
the remaining 25 sets within a specified time period. Explain to the customer
that the smart money is that inflation is not transitory and prices are
expected to rise. By committing to the additional graphics, the customer
benefits by locking in the agreed upon price.

 

Conclusion.

If the annual inflation rate continues at
more than 8%, consumer confidence and spending will plummet potentially
resulting in what JPMorgan Chase CEO Jamie Dimon forecasts as an “economic
hurricane.”

In an effort
to combat inflation the Federal Reserve will likely continue to raise interest
rates. While the Fed’s aggressive monetary policy will constrain inflation, the
economy will abruptly cool down.

 

With a
recession looming, be alert to warning signs including slowing sales compared
to last year and fewer requests for quotes. In your conversations with
suppliers and business associates query them about any changes that they are
experiencing in running their businesses. 

 

When the financial clouds begin to darken
on the country’s horizon will your business be prepared to weather the
impending storm?

Just
remember this: When did Noah build the ark? Before the flood!  


About Jim Hingst: Sign business authority on vehicle wraps, vinyl graphics, screen printing, marketing, sales, gold leaf, woodcarving and painting. 

After fourteen years as Business Development Manager at RTape, Jim Hingst retired. He was involved in many facets of the company’s business, including marketing, sales, product development and technical service.

Hingst began his career 42 years ago in the graphic arts field creating and producing advertising and promotional materials for a large test equipment manufacturer.  Working for offset printers, large format screen printers, vinyl film manufacturers, and application tape companies, his experience included estimating, production planning, purchasing and production art, as well as sales and marketing. In his capacity as a salesman, Hingst was recognized with numerous sales achievement awards.

Drawing on his experience in production and as graphics installation subcontractor, Hingst provided the industry with practical advice, publishing more than 190 articles for  publications, such as  Signs Canada, SignCraft,  Signs of the Times, Screen Printing, Sign and Digital Graphics and  Sign Builder Illustrated. He also posted more than 500 stories on his blog (hingstssignpost.blogspot.com). In 2007 Hingst’s book, Vinyl Sign Techniques, was published.  Vinyl Sign Techniques is available at sign supply distributors and at Amazon. 


© 2022 Jim Hingst, All Rights Reserved



Terimakasih telah membaca di Piool.com, semoga bermanfaat dan lihat juga di situs berkualitas dan paling populer Aopok.com, peluang bisnis online Topbisnisonline.com dan join di komunitas Topoin.com.


Comments

Paling Populer

To Top