When is it Time to Let a Customer Go?

Most business owners know in their guts that a good chunk of customers are not profitable. But in a universe in which it's drummed into us that the customer is always right, it amounts to heresy to admit that a customer may, in fact, be wrong and should go.

It's difficult to send any potential revenue packing, but culling the client list is worth it--it frees up resources to take better care of your best customers.

The Pareto principle, more commonly known as "the 80-20 rule," can be applied to customer profitability. In short, it means that 20 percent of your customers likely provide 80 percent of your profits. Inversely, it says that 20 percent of your customers may be sucking up an astounding 80 percent of your direct customer costs.

The problem is that many small-business owners don't have the tools they need to determine if one unprofitable client is worth nurturing for a big payday down the road, or if they should say, "Sorry, I can no longer work with you," and move on.

Analyze Profit By Customer
Profit equals revenue minus costs. Simple, right? To analyze customer profitability, we must assign revenue and costs to each customer. For those of you with thousands of customers, you'll want to put them into groups. For example, a restaurant could divvy up its patrons among the breakfast, lunch and dinner crowds; a building-supply house could group retail and wholesale customers separately.

Revenue is usually pretty easy to pull, since accounting systems can match each sale or invoice to a specific customer. Costs, however, are trickier to determine. Without burying you in the arcane world of cost accounting, here’s a simple yet effective approach. Assign the costs of goods sold plus the direct costs of acquiring (marketing) serving (your staff's time) and retaining (follow-up) customers to an individual or customer group. Keep in mind that for this exercise, overhead costs are not assigned to customers. But even without including overhead, you'll have enough information to make good decisions.

The actual number-crunching is, unfortunately, not trivial. You may need the help of an experienced analyst, controller or CFO to do the work or to set up and train your staff to periodically run the numbers themselves. Many times a company's chart of accounts needs to be tweaked to get costs into the right "buckets" to make the profit analysis correct and straightforward.

The Numbers Game
With a revenue-cost number attached to each customer, you can easily identify those who are ruinously unprofitable. And now you have a choice: You can work to make them profitable--i.e., raise their prices or cut the costs associated with serving them--or get rid of them.

On the flip side, you've also identified customers that make up the majority of your profits. Don't just use that information to send them a nice thank-you note; consider exactly what it is that makes them profitable. Can you turn other customers into better ones? How can you find new customers like the most profitable ones you already have? And what do you need to do to keep them?

After running through this exercise the first time, make it a regular task (quarterly is a good frequency to shoot for). This way you can catch problems before they seriously affect your business; for example, a longtime great customer who suddenly turns into an unprofitable one. That's one client you want to nurture, not cut.

Copyright © 2012 Entrepreneur Media, Inc. All rights reserved.

Avoid the Common Legal Mistakes Made by Entrepreneurs Early On

For newbie entrepreneurs, building a business can be a hectic period of trial and error. Part of the adventure is wading through daunting legal matters.

The three most common mistakes entrepreneurs make in the early stages are failing to adequately protect their intellectual property (IP), not formalizing the equity arrangements among founders and inaction or haste in choosing the right structure for their business.

How can entrepreneurs protect their IP early on?
Before you form an entity, people are chatting; they might be at their current job, maybe they spend a couple of hours collaborating. And there's a question when you are going to develop a business around that: Who owns that idea?

Once you form an entity, that company doesn't own that IP unless you get it into the entity. You get it in by licensing it or by an Assignment of Invention agreement. All the founders--anyone with whom you collaborated, anyone who gave you a nugget of an idea--needs to get assigned into this company.

How can founders avoid disputes over equity arrangements?
It's sort of like a prenup. The way we propose it is, the company is going to have to exist when one of you leaves. So picture yourself as the founder who stays. Would you be OK with that other guy walking away with 50 percent of the company? If you wait [to formalize equity agreements] and things have gone sour, that's when you end up paying people a lot more than they would have gotten.

One of the biggest reasons for failure we see is this [type of] founder fighting. If you don't have the equity sorted out, it becomes all-encompassing and nasty and personal.

What are some considerations when forming the company?
Making sure you are choosing an entity in a jurisdiction that makes sense for what you're doing. What happens is that there are so many choices that people choose the wrong one, or they push it off and don't actually form the company. There are a few types of entities (a corporation or a limited liability company) and there are different tax treatments (a C Corp or an S Corp). All the names are very scary to entrepreneurs.

The mistake is in not forming the entity, or just forming an entity that their buddy who's a real-estate lawyer told them to form without really thinking it through. There's this inertia and fear, then making the quickest decision as opposed to the right decision. It's helpful to talk it through with a lawyer.

Did you have a problem that if addressed early on could have been avoided?  Let us know below.

Courtesy of Entrepreneur.com

Sacrificing Your Business Ethics. Is it Worth It?

Are business ethics in danger? A 2011 report from the Ethics Resource Center found that "ethics cultures are eroding and employees' perceptions of their leaders' ethics are slipping." Employees are experiencing increased retaliation against whistle-blowers as well as more pressure to break rules.

This is really not a surprise. When the stakes are higher, such as they are in today's tough business climate, people may feel more pressure to act unethically to produce results, whether it's lying to customers, bad-mouthing competitors, or undermining co-workers.

That kind of behavior can cause significant problems with morale and could even lead to legal issues. It is critical for business leaders to take a stand when it comes to ethics. To follow are some tips to do help you do so.

Make your expectations clear. 
Teach employees what you mean by ethical behavior -- there's no simpler way to do so than to write down your expectations. Include your expectations when it comes to ethical decision-making in your employee handbook or in other documentation that employees receive during their first days on the job.

In addition to mapping out the behavior you expect, give employees some guidelines to help them when it comes to making ethical decisions, including when they should turn to their managers for guidance and how to report unethical behavior they see around them.

Enforce your policies. 
When ethical breaches happen, there should be consequences. If your top performer is cheating on an expense report or lying to customers, you're not just tolerating the behavior -- you're teaching your other employees to be unethical, as well, he says.

The behavior will likely multiply when others see what you'll overlook. For example, if your top performer is lying or mistreating others, it's likely only a matter of time before he or she does the same to you.

Be your own change agent. 
The best-laid ethics policies won't matter if you don't walk your talk. Employees watch you for cues about how they're expected to act. When you cut ethical corners, they notice and are likely to think the behavior is okay.

Instilling ethics into your organization is probably going to cost more than you want to pay, says Josephson. It's tough to be a model citizen and rein in behavior that, while helping your business earn, isn't on the up-and-up. In the long run, however, the damage that ethical lapses can cause may cost you far more than letting go of an unethical employee or some bad business habits, he says.

Do you have an employee that took it too far and hurt your business? We'd love to hear your story.

Courtesy of entrepreneur.com 

Scale Your Company without Shedding Core Values

Most start-ups are looking to grow. But once success hits, how can you scale your company without shedding the shared values and culture that helped make you successful in the first place?

As you move beyond you initial start-up stages, here are four ways that to strive to keep your small business values as you continue to grow:

Keep a small-business owner's perspective. 
When you are a really small business, it is easy to empathize with the pains felt by your small business customers -- be it paperwork keeping them from the work they love, to struggling to grow their own businesses. As you grow, it's critical that you continue to see things from the small business owner's perspective.

Empathy is important in more than just customer support. From marketers to product design and quality assurance, you want your employees to all be able to step inside the small business owner's shoes and then focus on how to make their lives easier.

Build a foundation of shared beliefs. 
Every business has its own culture, whether you define one or not. It doesn't mean that all of your employees must think exactly the same way as management does. But by creating a set of shared beliefs, everyone has a framework for how to set priorities, make decisions, treat customers, and treat each other.

To keep your company's core beliefs fresh in everyone's mind, consider writing them down somewhere highly visable. For example, online retailer, Zappos, has the 10 core values of the company written on every staff member's nametag. Whether you do this or not, the actions of your company's leaders will always speak louder than any words in the corporate manual.

Create open channels of communication. 

When your company is small everyone wears multiple hats and experiences the business from multiple dimensions. As a company grows, communication can become a labyrinth and employees get pigeonholed into one or two roles.

Develop company culture outside business hours. 

If a company expects employees to love its customers, the company must love its employees. Include a lot of activities outside of the office -- in fact, fun should be one of your values. For example, one weekend every year, the entire company and their families could take a group vacation. 

Courtesy of CNNMoney

Your New Business - Get Off on the Right Foot

There are a multitude of legal issues to think about when it comes to starting your business. 

Everything from your business name to its structure to its operation has legal implications. What follows is a sampling of some of the legal concerns you may want to address with your attorney before you start your business.

Your Business Name

You will need to make sure that the business name you plan to use is not already being used by another business. You can do this by doing a name search with the appropriate state agency, which is usually the office of the Secretary of State. If your chosen name is not already in use, you can reserve it with the Secretary of State's office for a period of time, about 120 days, while you prepare your articles of incorporation, articles of organization, or a partnership agreement.

Your Business Structure

You will need to decide which business structure best suits your business. Your business could be structured as a sole-proprietorship, partnership, limited partnership, corporation, S-corporation, or limited liability company. To decide what form is best, you will need to consider liability issues associated with your business and which form will provide the best tax structure for your business.

Business Licenses

Depending on what type of business you plan to engage in, you may need a variety of licenses or permits. At a minimum, you will need a business license and tax registration. Read the related article on licensing requirements for more information.

Non-Disclosure Agreements

If you will be setting up financing for your business or entering into contracts with suppliers, you should consider confidentiality and non-disclosure agreements. Since these outside firms will have access to business information that you may want to keep private, you should consider having them sign these agreements. If you are ordering a thousand gizmos for your grand opening, you don't want the supplier to call your competitor to see if they want a thousand gizmos so that they can offer them on the same day. The more confidential information your business plan contains, the more important these agreements are.

Zoning

When you are selecting the location for your business, you will need to make sure it is properly zoned for the type of business you plan to operate. It is not okay to just assume that, if your business is of the same type as the one that is currently there, the zoning is appropriate. Zoning may have changed while the other business was operating, and that business might have been provided an exemption that won't be provided to yours.

Estate Planning Task List

Estate planning will ensure that your loved ones know your wishes -- and that they're cared for in the unlikely event of your death.

While many of us like to think that we're immortal, the only two things in life that are certain are death and taxes, to paraphrase Ben Franklin. Not only is it important that you have a plan in place in the unlikely event of your death, but you must also implement your plan and make sure others know about it and understand your wishes. Lest, as Franklin also said, "by failing to prepare, you are preparing to fail."

If you've procrastinated on your estate planning, here's a list of tasks to get you going in the right direction:

Must-do No. 1: Inventory physical items.
Go through your home and make a list of all items worth $100 or more. Examples include the home itself, television sets, jewelry, collectibles, vehicles, guns, computers/laptops, lawn mower, power tools and so on.

Must-do No. 2: Inventory non-physical items.
Add up your non-physical assets. These include things you own on paper or other entitlements, including brokerage accounts, 401k plans, IRA assets, bank accounts, life-insurance policies and all other insurance policies such as long-term care, homeowners, auto, disability, health and so on.

Must-do No. 3: Make a list of credit cards and debts.
Make a list of open credit cards and other debts. This should include auto loans, existing mortgages, home equity lines of credit, open credit cards with and without balances and any other debts. A good practice is to get a free credit report once a year and make sure you close out any credit cards that are no longer in use.

Must-do No. 4: List organizations you belong to and charities you support.
If you belong to organizations such as AARP, The American Legion, veterans' associations, AAA auto club, college alumni groups, etc., you should make a list of these. Include any other charitable organizations that you proudly support or make donations to. In some cases, several of these organizations provide accidental-death life insurance benefits (at no cost) for their members and donors, and your beneficiaries may be eligible. It's also a good idea to let your beneficiaries know which charitable organizations are close to your heart.

Must-do No. 5: Send a copy of your lists of assets to your estate administrator.
When your lists are completed, you should date and sign them and make at least three copies of each. The original should be given to your estate administrator (we'll talk about him or her later), the second copy should be given to your spouse or another loved one and placed in a safe deposit box, and the last copy you should keep for yourself in a safe place.

Must-do No. 6: Review IRA, 401k and other retirement accounts.
Accounts and policies in which you list beneficiary designations pass via "contract" to the person or entity listed at your death. It doesn't matter how you list these accounts and policies in your will or trust, because the beneficiary listing will take precedence. Contact a customer-service representative or your plan administrator for a current listing of your beneficiary selection for each account. Review these accounts to make sure the beneficiaries are listed correctly.

Must-do No. 7: Update life insurance and annuities.
Life insurance and annuities will pass by contract as well, so it's important to contact all life-insurance companies with which you maintain policies to ensure that your beneficiaries are listed correctly.

Must-do No. 8: Assign transfer-on-death designations.
Many accounts, such as bank savings, CD accounts and individual brokerage accounts are unnecessarily probated every day. Probate is a costly and avoidable court process in which assets are distributed according to court instruction. Many of the accounts listed above can be set up with a transfer-on-death feature to avoid the probate process. Contact your custodian or bank to set this up on your accounts.

Courtesy MSN Money 

Does Your Business Exude Trust?

There are many different sources of trust. Not every business can effectively draw on every source, but there's no business that can't be strengthened by drawing on some of them:

Authority: 
doctor, lawyer, accountant, police officer, fireman

Affinity:
shared background, experience, philosophy, fraternity

Credibility:
factual basis for trust

Longevity:
years in business, in the community

Celebrity:
being known or being known for something

Familiarity:
reassuring omnipresence

Frequency:
the more often heard and seen, the more easily trusted

Second-party transferal:
earned, engineered, borrowed, rented, purchased endorsement

Place:
geographic or target market; being for a certain customer

Demonstration:
seeing is believing

People trust for the wrong reasons. By understanding how people actually come to trust, based on the above sources and others, you will be able to deliberately manufacture maximum trust.

People have an underlying, ongoing anxiety and angst about nearly everything -- from the news they watch, to the car they drive, from the food they eat to virtually everybody from whom they get advice, services, and products. In this environment, trust is a huge advantage. But few advertisers, marketers, or sales professionals focus on this advantage. Instead, they drift to cute advertising, low prices and discounting, or rely on product-centric presentations. This is why trust-based marketing can be such a powerful tool. You'll leave your cluttered and competitive marketing environment and, via a road less traveled, appear uniquely attractive.

Certainly the more significant a purchase is to a buyer, the more consciously he seeks a trustworthy seller or provider, but you can't ignore the role of trust in just about every act of commerce.

A big breakthrough in your approach to trust-based marketing will be forcing yourself away from rational, logical thought about why your customers would or should trust you. Instead, if you can "decode" how they really process you and the ideas, information and propositions you present, you'll find yourself holding a new key to the vault.

One of the main sources of trust is "pass along." You trust somebody because somebody you trust trusts him. It's passed-along trust.

Targeted investors handed their money over to Bernie Madoff and his epic Ponzi scheme voluntarily. And most who did so were sophisticated and wealthy individuals, managers of family fortunes, and paid administrators of universities' investment portfolios and pensions. All had access to competent financial, tax and legal advisors. Yet they handed wealth to Madoff. None could explain exactly what Bernie did with their money or how he consistently generated above-par returns. Trusting Madoff was irrational, so why did so many who should have known better? Because someone who they knew and trusted, trusted him. Yes, he served on the board of the Nasdaq stock exchange and had offices and trappings of wealth manufactured with the stolen money. But at the core, Bernie perpetuated his scam thanks to passed-along trust.

This reveals something very powerful about selling inside the fortress walls of a closed community like the very wealthy. Their fortress walls are their reliance on peer-provided information. They trust each other and distrust all others. But once the fortress is penetrated, with just one insider inhabitant, it is no longer as a safeguard for the other inhabitants. In a small, clannish industry or segment of an industry, the business-to-business marketer, the consultant, the software developer, the "expert" of any sort needs only the trust of one or a few well-known members, and all others' defenses against him disappear.

And the harder it is to gain the trust of anyone in such a community, the more viral it becomes, and the more valuable its viral nature. This is why it is so worthwhile to gain the trust of key centers of influence within any target group in which you seek to develop a clientele, and why it is worthwhile to invest in securing that trust.

Courtesy of Entrepreneur Magazine