Principals of growth
Sooner or later, all SMMEs arrive at the growth crossroads where tough business decisions face them. Growing is a fine balancing act as flying too close to the sun too soon, can cause you to crash and burn. Here’s how to grow cautiously.
You have successfully negotiated the first few years of running your own business. Now – are you ready to up the ante?
In many instances, spreading your wings means setting your sights on a different client base. According to Rob Smorfit, chairman of South African Chamber of Business’s (SACOB’s) Small Business Committee, the size of your business relates directly to the size of your clients. “Big corporates perceive it to be very risky to do business with very small companies as they don’t have confidence in their ability to deliver, absorb risk and, sadly, manage their cash flows.”
Furthermore, as a one-person band it is practically impossible to meet the needs of a large multinational corporate on your own. The exception is professionals who provide a very specialised, limited service, such as consulting to the legal department on a specific aspect of corporate governance.
Therefore, it is quite likely that your business would start out servicing a limited number of smaller clients. But as you grow and gain experience, appoint more employees and build a strong network of associates, the possibility of netting a few blue-chip clients could very well be within your grasp.
The advantages of having a large company on your client list are numerous: a high-value, long-term contract provides income assurance and job security, and you are bound to gain valuable experience. Additionally, a big corporate under your belt is almost guaranteed to impress prospective clients and make them see you with new eyes.
Be warned, however, that servicing a large client has its pitfalls and you need to sign the contract with your eyes wide open:
- Big clients will stretch your delivery abilities by expecting, for instance, someone on 24 hour standby or the ability to roll out your service to their staff members throughout South Africa and sometimes even internationally.
- You might have to invest in more sophisticated systems to be able to invoice separately for a multitude of projects running simultaneously.
- A large client can absorb a disproportionate amount of your resources, making it difficult for you to win new clients or maintain existing client service levels. As a result, you could find yourself in the uncomfortable situation where a contract has ended and you have nothing to replace it with.
- For all their money and sophisticated systems, big companies are notoriously slow payers and you could run into a cash flow predicament if you don’t manage the situation closely. Find out if your client offers special payment terms for SMME businesses and insist that those are applied to you. Submit your invoices on time, correct and to the right person to prevent delays.
Don’t sneeze at small
A lot of professional services providers spend precious time chasing after the big corporates. But have you ever stopped to think about the advantages of smaller clients?
- They don’t have complicated and time-consuming tender processes.
- They are more likely to pay within 30 days or less.
- They are solutions-driven and focus on the job that needs to be done.
- They often form long-term supplier relationships as they are not required to rotate suppliers every few years.
Getting rid of customers who are bad for business
When you start out on your own, there is always anxiety about where the money to pay the bills will come from. As a result, small business owners often take on any and every client that comes their way and stick with them no matter what.
Believe it or not, this might not be the best way for you to do business. Some clients are simply not good for your business and you have to learn to identify them and deal with them.
- Do the math. Before entering into a contract, make sure the terms and conditions, delivery dates and scope of work are within your reach and won’t require you to take life-threatening risks. Similarly, calculate the annual revenue from each customer and the cost of serving them, adding such factors as the costs of materials, unprofitable consulting time and the cost of returned or rejected products. You have to know whether a client is truly profitable or not.
- Some clients, despite being financially profitable, can be emotionally too expensive. Contrary to popular belief, the customer is NOT always right and you have the right, and responsibility towards yourself and your employees, to take action when clients become abusive and unreasonable.
- Always try rehabilitation first. Before firing problem clients, try to put systems in place to address the problem and discuss the proposed way forward with them. You could try to refer them to someone else for some of the services where they cost you money, or charge them more in cases where their indecision impacts on your delivery capabilities, or replace the consultant working on their account.
- Make sure you can afford to fire the client by preparing your business. You might find that replacing the lost revenue is fairly easy seeing that all the time you previously spent on keeping one person happy, can now be invested in finding new work.
The 80/20 rule
The Pareto Principle derives its name from a nineteenth-century Italian economist and is a performance rule which states that 80% of your results (or revenue) are achieved from 20% of your activities (or client base).
Put Pareto to work by:
- Focusing your attention on those clients who provide you with the bulk of your work and your income.
- Concentrating your marketing efforts on those activities that have traditionally delivered the best results, eg, word of mouth referrals.
- Putting your efforts into those services which represent the major component of your income.
- Determining which activities sap your energy and time but that don’t make a useful contribution to your results. Once identified, either fix them or eliminate them.
A penny for your thoughts?
As a professional, you sell your ideas, approaches and methodologies for addressing clients’ business issues. It is therefore very important to protect your intellectual property.
Copyright is the material expression of an idea. The law of copyright protects literary, musical, artistic and creative works, computer programmes, broadcasts, sound recordings and cinematograph films. Copyright in these works cannot be registered because the right is established automatically once the work is created. Only copyright on films can be registered. For your process or methodology to be copyrighted, it has to be written down.
As a rule of thumb, copyright infringement occurs when your copyrighted material is used for financial gain as opposed to private or personal use.
You can “register” your copyright electronically on the Copyright Protect website. When you submit a file for registration, their secure, independently audited servers will time stamp your file utilising highly sophisticated technology, providing you with irrefutable proof of the time and date that you submitted a file. This could be very helpful should your copyright ever be disputed as you can prove without a shadow of a doubt that the file existed on a specific date. See www.copyrightprotect.co.za
Also remember that your intellectual property can be an additional source of income through licensing. By licensing your methodology to another person or company, you give them the right to use it in exchange for a fee payable to you. There are risks involved in this process, for instance if the third party misuses your concept and blames the less-than-perfect results on you, or does not adhere to the terms of the agreement. It is, therefore, essential to consult attorneys who specialise in intellectual property to ensure that your rights are properly protected.
For more information, contact the Companies and Intellectual Property Registration Office (CIPRO) on tel: 0861 843 384; email: firstname.lastname@example.org or visit www.cipro.co.za.
Sourced: Small Capital
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