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.

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.

Does Your Small Business Need an Attorney?

Many small businesses pay too little attention to the legal side of their business, but that can be a big mistake. One wrong move or oversight can put you at risk, jeopardize your company and cast a pall over things for a long time. This isn’t meant to scare you, but to simply put you on the alert to the fact that most times preventive medicine is far less costly and stressful than facing the repercussions of a decision you “thought” was correct.

It may not be apparent, but there are many ways a lawyer can add value to your new business, from keeping you on the legal straight and narrow to providing broader, strategic business advice.

Follow these guidelines, keeping your vision in mind, and you will be ready when it comes to decide on hiring an attorney for your new business.  

To Hire an Attorney Or Not?

The best attorneys prevent problems, help you make key foundational decisions about the structure and organization of your business, and help you make strategic moves and deals that are crucial for your success. If you have lingering questions about the particulars of company structure or are starting a business that you hope will quickly become a large-scale enterprise, you probably should have an attorney guiding you through the startup process. Attorneys understand the legal implications of every kind of new business. They can help you select an appropriate structure and can help you cope with nuances in legal forms and the law that you might overlook. Just imagine finding out a year down the road that you’ve caused yourself grief by omitting some key legal clause or caging yourself into a suboptimal business structure – a sobering thought.

Understand the Specific Legal Needs of Your Business.

Another factor that should help you decide whether you require the services of a lawyer is the nature of your business, products and services.

For example, if you’re starting a business based on some new, high-tech product that you’ve developed, you better have a patent attorney working with you every step of the way. If you’re trying to get your brand trademarked, an attorney specializing in publishing and marketing would be invaluable.

Some kinds of small businesses may be deceiving in this regard. If you have a scarf with a cool design that you want to manufacture and sell in stores, you need to look past the scarf-making and marketing alone.  Make sure that your designs are legally protected, or soon you may see them everywhere. You want to make sure that your intellectual property is rip-off-proof.

Find a Great Attorney for Your New Business.

The best way to find a reliable and trustworthy attorney is through word of mouth. Whether your friends know someone, or your accountant, insurance agent or business partners recommend someone, referral is the best way to go.

Interview a handful of prospective lawyers and make sure you feel comfortable putting your dream in their hands. Small business owners should insist that their attorney has some business experience. Have a list of questions ready and don’t settle. When you’re interviewing, ask them about their fees and billing plans.

Make sure they understand what kind of business you want, and that they have your best interests in mind.

Demand a Lot From Your Attorney.

This is one of those business partnerships where you can anticipate high value-added. In fact, you should reasonably expect your relationship with a good lawyer to deepen and broaden into one of the two or three most important partnerships that you have as an entrepreneur and business owner.
Beyond the legal checklist, attorneys can help you see the broader picture, given their training and experience. A good attorney can provide a whole new spectrum of ideas, contacts and specialists to help you grow your business.

Look for an attorney who’s a deal maker, capable of being an “upside” thinker rather than one who’s only focused on the downside risk. “The worst thing is a lawyer who says, ‘You can’t do that.’ Rather, they should say, ‘You can’t do it that way,’

Expect to Pay Them What They’re Worth.

An attorney’s startup fees will vary depending on the business, size and geographic location, the experience of the attorney, the details of their service, and your financial situation. Some attorneys may be willing to do the first consultation for no charge, but expect to pay at a billable hourly once the meter is running. Some cases may be worked out on a project-fee basis.

The Bottom Line.

Attorneys can be a great source of advice and partnership when you’re starting a business or navigating legal landmines. But make sure you feel comfortable and can afford his / her services before you begin.

Do Your Homework When Starting Your Business

Avoiding Legal Problems
Arm yourself with basic knowledge of business law so you're alert to your company's obligations and rights.

Practice prevention. Have your attorney review contracts and agreements before they're signed.

Get your attorney's opinions on documents you have drafted - such as employee policies - before you put them in place. You want to make sure they meet the requirements of the law.

Familiarize yourself with trademark and patent laws so you don't violate them. Learn how to apply for a trademark or copyright should you need to do so.

Understand the law as it pertains to your organizational structure. Your legal obligations as a C corporation, for example, will differ from those as a sole proprietor.

Policies for Employers to Implement
A policy, which states the company is an equal opportunity employer and strongly enforces a nondiscrimination policy.

A strong sexual harassment policy detailing what isn't accepted at your place of business.

A policy about phone and/or e-mail communications.

Expectations of employees.

Include how your company plans to monitor or take action on all of the stated policies.

Obtaining a Lease
Be prepared to negotiate. The landlord's printed lease will most likely favor the landlord.

Match the lease to your business's needs. If location is important, you'll want a longer lease - or a shorter one with options to renew.

Understand who pays what - such as utilities, repairs, insurance and even taxes. You may want to pay slightly higher rent for eliminating these items.

Be aware that your negotiating power is stronger in a market where lots of commercial space is available.

Remember that a lease is a legal document. Have your attorney review it before you sign.

Advertising Legally
Don't engage in false, misleading or deceptive advertising. Make sure your claims are accurate.

Obtain written permission to use photographs, endorsements, or quoted matter. Remember that some material is protected by copyright.

Don't use words and phrases like "free" and "easy credit" unless they're true. Easy credit, for example, means you offer credit to poor risks without charging them more for it.

Remember that consumers can sue you for deceptive advertising, and federal, state, and local governments can take action against you.

Consumer Credit Basics
Know the laws. If you must grant credit directly to consumers, familiarize yourself with both federal and state consumer credit statutes.

Tell the truth. The Truth in Lending Act requires you to disclose exact credit terms, such as the monthly finance charge and annual interest rate.

Follow correct procedures for handling billing mistakes. If you don't, you may have to give the customer a $50 credit even if your billing was right.

Don't discriminate on the basis of race, color, religion, national origin, age, sex or marital status when granting credit.

Developing an Employee Handbook
Some company policies have to be in writing - such as policies on sexual harassment and discipline - so employees know what's expected of them. These can form the basis of an employee manual.

Draft your employee handbook yourself or assign someone else in the company to do it. Then have it reviewed and fine-tuned by your lawyer.

Include a disclaimer stating clearly that the manual is in no way a legal contract.

Make sure every employee receives a copy of the handbook and signs a statement saying they've read it. Review it every six months or so and update it as needed.

Protecting Yourself from Employee Lawsuits
Obey the laws regarding employees. Don't discriminate in hiring, for example, or permit sexual harassment.

Hire carefully. Look for people with a strong work ethic and avoid hiring those who feel life owes them something.

Adopt strong employment policies. Communicate them clearly to employees and enforce them.

Keep good records on employee mistakes, even when they're not firing offenses. Document your own actions and the reasons behind your employment decisions.

Consider buying employment-practices liability insurance (EPLI).

When Military Duty Calls
Employees have the right to use their vacation time or personal days during their service; they may also opt for unpaid leave.

You aren't obligated to pay employees who are absent on account of military duties, unless your company policy says you will.

If your company does have a paying policy for military service time, you can't require employees to use their vacation or paid leave time.

You must extend the same benefits to employees who are absent for military service as you do to employees who are on nonmilitary leaves of absence.

You may temporarily fill vacancies left by military employees absent for service. However, upon their return, military employees are entitled to the same positions they left.

Brought to you by SCORE, "Counselors to America's Small Business."