engraving BUSINESS MANAGEMENT By ashley bray By JOHN HACKLEY
Choose Your Customers Wisely!
hen reviewing your financials at the end of the month, do you see red or black? Do you know why? Is it a trend or an anomaly? There are many reasons for what you see in the numbers and why your bank account looks the way it does. If you are not impressed with your performance, one particular silent killer is pricing your work low just to gain customers and win deals! In this article, I am going to show you why you need to be smart about how you choose your customers and set your pricing. We all want to hit our quotas, keep cash flowing, and maintain enough work on the shop floor to avoid unhappy workers. But at what cost for you—the cost of going out of business? The bottom line is that if you sell cheap, the odds of not making a profit are pretty darn good. Then, if or when
Sign Builder Illustrated
you mishandle production or installation (in the least), there is no margin for recovery and you are hosed! Let me drive the point home with some leverage. How many dollars’ worth of production must be sold to recover a loss
pricing your work low just to gain customers and win deals can affect your performance. of $100 in rework/bad debt if your net profit after tax is 2 percent? The answer is $5,000. That’s right— at a net profit level of 2 percent, you
must produce $5,000 worth of billings to return your profit and loss statement to its original position. So you need $100 of net profit to make up for the loss. But our Net Profit is only 2 percent; that is, each dollar of billing only produces two cents of net profit. So the equation we are now asking is: “How many $0.02 does it take to equal $100? The answer is 100 divided by 2 percent—which equals $5,000. Table 1 (pictured, page 18) can be used to calculate the amount of sales required to replace income lost through bad debt, charge off, or rework incurred at a Net Profit after Tax Margins 2 to 5 percent. So is it you that’s setting the price or the customer? If it is you, you need to go back to your common sense corner and rethink your proposal. If it is the customer, it is time to educate them on the merits of your value signshop.com
Photo: Shutterstock/ fizkes.
Selling cheap to win a deal will run you right out of business.