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.

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

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

Is Entrepreneurship For You?

Starting your own business can be an exciting and rewarding experience that offers numerous advantages, such as the ability to be your own boss, set your own schedule and make a living doing something you enjoy.

Becoming a successful entrepreneur requires sound planning, creativity and hard work. It also involves taking risks because all businesses require some form of financial investment. To begin evaluating whether or not owning a business is right for you, consider the personal characteristics and qualities that can help improve entrepreneurial success.

Anyone Can Learn How to be an Entrepreneur

Entrepreneurs often have similar traits and characteristics. Here are some of the qualities that can go a long way in bolstering business success. If you don't have all of these traits, don't worry. Most can be learned with practice.

• Creative
• Inquisitive
• Driven
• Goal-oriented
• Independent
• Confident
• Calculated risk taker
• Committed
• Avid learner
• Self-starter
• Hard worker
• Resilient (able to grow from failure or change)
• High-energy level
• Integrity
• Problem solving skills
• Strong management and organizational skills

Businesses are built on ideas. In fact, the first step to starting a business is to come up with an original idea. Therefore, entrepreneurs must be open to thinking creatively. Are you able to think of new ideas? Can you imagine new ways to solve problems? Do you have insights on how to take advantage of new opportunities? Many people believe that some individuals are just born with creative minds, while others are not. This might be true, but you can learn to be more creative if you want to become an entrepreneur!

One approach to improving creativity is to research and learn as much as you can about the things that interest you. New ideas can come from reading or by talking to others who have the same interests. Another way to spark your creativity is to think about a problem and picture different ways to solve the issue. Once you have an idea, think it through and determine if it is a reasonable option. If it is, try it. If it isn't, keep thinking. Don't limit yourself. Be open to a variety of possibilities and your creative mind will naturally form new ideas.

To keep your creativity flowing, use these helpful hints:

• Look for new ideas in a variety of ways
• Keep the process simple
• Start small
• Try, try again

Courtesy of U.S. Small Business Administration

Let Your Employees Breathe

After you've surrounded yourself with the best talent you can find, creating an environment that stifles open communication can render that investment useless.

Perhaps your employees are afraid to give you honest answers about your business or feel like they need to agree with every idea you have (no matter how ill-advised). If that's the case, your business could be suffering because you're not getting the value of their expertise, creativity, and insight. A few ways to get your team comfortable with telling you what you need to hear instead of only what they think you want to hear.

Don't overreact.
It's never fun to hear bad news or smile while someone is telling you that your latest idea--well, it's pretty bad. However, if you are argumentative or combative every time someone else delivers criticism, you're going to stifle honest feedback. Pay attention when an employee is speaking to you and refrain from becoming defensive. If you feel like you can't respond favorably or even neutrally, thank the person for speaking up and say you'd like to discuss the matter more later. Taking a break before you respond will give you some time to calm down and be more objective about the feedback.

Welcome criticism. 
It may seem obvious that you're open to suggestions, but you have to tell your people it's okay to be honest with you. During meetings, invite feedback in a general way and emphasize that employees are also welcome to give their opinions -- no matter how critical they are -- in private. Some may feel uncomfortable criticizing the boss in front of others.

Be aware. 
Pay attention to what's going on around you and take your cues from the environment. If no one has come to you with ideas or concerns lately or if you walk into a group and it suddenly goes silent, the problem could be you. Make sure you approach employees individually -- and in a nonthreatening way. Consider having coffee with one or a small group of employees every month to discuss ideas, which can create an informal and more comfortable atmosphere.

Five Essentials for Your New or Existing Business

Small business owners must effectively manage the legal aspects of running a business. Startup operations consult with legal professionals to ensure successful completion of corporate filings and other regulations. Established organizations are often faced with legal matters that require knowledge of small claims or arbitration. Whether a company is just starting out or has been in business for years, basic legal guidance is a necessity in today’s small business community.

Your Business Structure
The Small Business Administration recommends that business owners choose an ownership structure to operate their business. Ownership structures legally establish a company as an official business. Common structures, such as partnerships, limited liability companies and corporations, provide business owners with legal protection. An appropriate business structure not only offers certain tax benefits, but it also provides business owner’s personal protection against lawsuits or liability claims from clients or other parties.

Law Suits - Legitimate or Frivolous
Consumers file lawsuits against small businesses everyday. Some lawsuits are legitimate while others are frivolous claims against business owners in an attempt to collect monetary damages. According to the American Bar Association, in an attempt to limit and/or prevent frivolous lawsuits, Congress proposed the Lawsuit Abuse Reduction Act. The act is designed to discourage claims that have little or no legal merit. Small business owners can protect themselves against potentially devastating lawsuits with a thorough understanding of the different legal aspects of their industry and strategies in place to mitigate potential liabilities before they become a concern.

Complying with Labor Laws
Small business owners must proactively comply with labor laws and fair employment practices if they have employees. The U.S. Department of Labor established the Fair Labor Standards Act to protect employees from unjust wage and work hour practices of employers. Small businesses should become familiar with applicable employment laws to avoid penalties and possible lawsuits filed by employees. The Department of Labor provides compliance tools business owners can take advantage of to ensure they are in compliance with laws that affect organizational operations.

Make Sure Your Business is Protected
Many small business professionals are required to invest in liability insurance to protect them in the event they cause harm or injury to a client or customer. Medical professionals must maintain malpractice insurance in case their negligence harms a patient. Other professionals, such as insurance agents, must carry valid “errors and omissions” insurance to protect against claims from their clients. A variety of insurance exists to protect different aspects of a business. Insurance protection is a necessity for building structures, employees and customers that visit a business establishment in person.

Considerations
Small businesses are subject to several regulations on a local and federal level. In addition, small business owners are obligated to consider how their business practices affect customers, employees and others within their community. It is necessary for business owners to consult with legal counsel or at least become familiar with the legal issues that can have a profound effect on the success of company operations.

Preventive Medicine Saves Anguish Later

People don't want to think that an accident or illness would prevent them from saying what they want — or don't want — when it comes to their future medical care. We tell ourselves: I have plenty of time to take care of those things later … if I get sick … when I'm older.

But things do happen in our lives that are out of our control. Your family and friends need to know how you want them to handle situations if you're too ill to tell them. If they're left guessing, a conversation can quickly disintegrate into a confrontation. The fallout can result in guilt, uncertainty and arguments. Take these steps to ensure this doesn't happen if such a situation should arise:
 
Know what you need.  
You'll need to draw up three documents, often referred to as advance directives. 

Draw up a living will and review it every couple of years.

• A living will alerts medical professionals and your family to the treatments you want to receive or refuse, and under what conditions. This will only go into effect if you meet specific medical criteria and are unable to make decisions.
• A health care power of attorney delegates a spouse, trusted family member or friend to make health care decisions for you if you are unable to do so. This document is also referred to as a health care proxy, appointment of a health care agent or durable power of attorney for health care. Be aware that a regular durable power of attorney only covers financial matters.
• A letter of instruction outlines any special requests you'd like to be carried out, such as plans for a funeral and names of people to contact. It also should include important phone numbers, such as your employer and your insurance agent or broker. Some people also include a list of meaningful possessions they'd like to give to certain loved ones. This is not a substitute for a will, but it helps clarify your intentions and feelings.

Put it in writing.
A living will and power of attorney are legal documents, but you can draw them up yourself. A letter of instruction is not technically a legal document. Many people opt to hire an attorney. You may want one, so they can apprise you of any relevant changes in the law that might affect your document. Most eldercare lawyers charge fixed rates, so you should be able to find one within your budget.

Sit down with your family. 
Especially the one who you've designated as a health care agent, and explain what you've decided. Give them a copy of your documents and have your doctor put one in your permanent medical record.

Review your papers every few years. 

Keep them in a safe, easily accessible place such as a secure file cabinet. If your family situation changes — through the arrival of grandchildren, for example, or a divorce — you may want to make changes.

Best Practices for Building Your Board of Directors

Entrepreneurs who want to take their business to the next level may eventually come to the conclusion that they need a board of directors. But what does it take to form an effective one?

To follow are some great tips for recruiting and retaining a board:

Look into the future:
Think long term and recruit directors who can govern the company you aspire to grow into rather than the small business you might be now.

Find a go-to person:
Have at least one director who understands boards and governance. Don’t rely solely on the lawyers and accountants to have governance skills.

Create job descriptions:
Establish a clear job definition for directors (executive and non-executive) and define the role the board will play in strategy, risk management, etc.

Do not play favorites:
Insist that all directors recognize their duty to the company as a whole (or all of the shareholders) rather than play a limited role of safeguarding the interests of one shareholder — even if it’s your biggest investor.

Include a variety of flavors:
Build a team that possesses a range of skills and diverse backgrounds in order to get different perspectives on each strategic discussion.

‘Yes Men’ (or Women) need not apply:
Select directors who would quit the board if they disagreed with a course of action you were taking.

Lean toward like-mindedness:
Seek consensus on all decisions, not majority voting, and be sure that all directors know how to assess issues from the perspective of the stakeholders and what is right for the company.

Draw that line in the sand:
Be clear about the differing roles of the chairman and CEO — and don’t try to combine them in one person.

Remuneration requires research:
Pay a fair and responsible equivalent, and seek expert advice if you need it.

Boardroom hierarchy: Remember that the CEO reports to the board; be ready for a challenge and embrace the collective wisdom and enhanced discipline.

What advice do you have for creating a board of directors? Add to this list in the comments below.