Every January, I take my company through a process to prepare it for the year’s challenges. The goal is to position the company to handle problems and take advantage of opportunities.
I’ve adapted this process through the years, as I gained more experience running a business. I like this process because it is useful regardless of the economic circumstances. Some parts of this process can be done once a year. You may need to do other parts more often in response to changing market conditions.
8 Questions to improve your business operations
1. Are your invoice collections running well?
Most business owners think about collections only from the perspective of the last step in the process—waiting for clients to pay. However, at that point, there is little you can do to improve things. Your only option is to call clients and ask for money.
The collections process should start before your client signs a contract. This idea is not as counter-intuitive as it sounds. It begins by having a process to check the commercial credit of your clients. Give payment terms only to clients who have good credit. This step by itself solves many problems.
If you use your own contracts, ensure they have well-written payment clauses. If you use your clients’ vendor contracts, review the payment clauses carefully.
Use a delivery acceptance document when you deliver products or services to your clients. The document should be signed by the right person, for example the site supervisor, GC, etc. An acceptance letter helps reduce potential disputes later on.
Submit invoices promptly and include all relevant backup paperwork. Include a copy of the acceptance delivery document for their records. Follow your client’s payment instructions carefully, especially if you work with large companies. Doing otherwise will only delay payment. Get a confirmation that the invoice has been received.
Lastly, follow up with late payers regularly, but treat everyone—even bad payers—professionally. It improves your chances of success. For more information, please see my column “Eight Steps to Getting Paid on Time” from the October 2017 edition of Glass Magazine.
2. Are your clients good payers?
The best invoicing and collections process will fail if your client has a bad commercial credit track record. This type of prospective client should either pay in advance or be avoided.
It’s impossible to avoid every late payer, but you can improve your odds dramatically by checking commercial credit reports. Companies such as Dun & Bradstreet, Cortera and others sell reports for very reasonable prices. Reports provide critical information such as:
- Payment history with other vendors
- Size of a company’s other vendor lines
- Payment trends
- Suggested credit line
The pandemic has affected every company’s credit profile. Check everyone. Never assume that a well-known brand must have good credit. Keep in mind that many famous brands are terrible payers.
3. Have you negotiated better terms with your suppliers?
Just as your clients pay you in 30 to 60 days, consider getting similar (or better) terms from your suppliers. Start discussions with suppliers and try to negotiate longer payment terms. Depending on your needs, ask for a larger line, longer terms or both.
4. Are you taking early payment discounts?
Taking early payment discounts can be a great way to increase your profits. If your vendors offer discounts and your finances allow it, consider taking them. Many vendors provide a 2 percent discount if you pay the invoice in 10 days or less. Terms vary by vendor. Those savings drop straight to your bottom line. For more information, please see my column “Strategies and Negotiation Tips for Early Payment Discounts” from the August 2017 edition of Glass magazine.
5. Are your costs aligned with your revenues?
Costs and revenues must always align. If your company has a loss that your reserves can’t handle, you have to cut costs. The sooner you do this, the better the outcome. If the company is profitable or breaks even, determine if profits and costs are sustainable. If they aren’t, consider cutting expenses.
However, there is always a risk with cutting expenses too far. Your company could be unprepared to handle growth opportunities once market conditions change.
6. Are sales and operations performing?
We try to review general sales and operations performance at least once a year. Often, we go through this process every quarter unless things are hectic. This review helps uncover performance issues. I use simple key performance indicators, or KPIs, that help find potential problems.
7. Can you handle a bullwhip effect?
In simple terms, the bullwhip effect describes what happens to supply chains when demand shifts. Several industries have faced these effects during the pandemic. It started when demand slowed down, and everyone in the supply chain cut costs. When demand increased aggressively in some sectors, companies did not have the resources to respond.
This situation affects you in two ways. Once demand picks up, you may face delays getting products from suppliers. If you made drastic cuts, your company would also affect clients who are downstream.
One can never fully forecast this effect because demand can be unpredictable. Countermeasures are not perfect and can add to expenses. These include strategies like order smoothing, good inventory systems, stringent return/cancellation policies and so on.
8. Are you using your free time productively?
Although things are better now for some, things can occasionally be slow. We implemented a rule that “free” time should be used productively. We classified activities into three areas.
Create job manuals
We asked everyone to document all the essential tasks they perform. This exercise was useful in case someone needs to take over in their absence. This task was a high priority due to the pandemic. We needed to make sure all tasks would be done, even if some team members required medical leave.
This effort has been invaluable. We have documented many operational processes such as payroll, payables, invoicing, collections, sales and more. Team members documented their jobs with written instructions and short videos taken with a mobile phone.
This information has been helpful for training new hires or when colleagues had to fill in for someone. There is one additional purpose for this process: we have created an operations manual that will be helpful if (or when) we decide to sell the company. We know there is a need for this sort of information from our own experience. We finance business acquisitions and know that buyers always ask for operations manuals, but few sellers actually have them.
We have started cross-training people for some of the essential tasks of the business. This effort is especially important for companies in which some important jobs are handled only by one person. We made sure that more than one person knew how to run payroll, do collections and so on. This endeavor integrated well with the process of creating job manuals.
Creating manuals and cross-training took up most of the available time, especially because things picked up quickly for us. However, when time allows, we encourage everyone to improve their skills. Employee improvement is good for the company and great for morale.