Small and medium-sized companies have many challenges, which are opportunities for improvement. Time-tested improvements were shared recently by the founder and managing partner of Riverlake Partners, a private equity firm that owns smaller and medium-sized businesses. Erik Krieger noted three opportunities for improvement common to many of the companies his firm has owned over the years, relating to billing, pricing and employee management.
Poor accounting systems are common, which creates significant problems, especially if billing and collecting are delayed. Krieger has seen companies doing good work that were slow to invoice their customers. And when those customers are large corporations, they often won’t pay until 90 or 120 days after being invoiced. Many corporate customers will use invoice modifications as a reason to re-start the payment clock, so change orders and additions need to be handled carefully in order to get payments promptly.
Some businesses are slow to actually ask for payment. They cannot blame their customers if they are not shooting out invoices promptly and if they are not following up on outstanding receivables. A good system for promptly sending invoices and for monitoring collections is vital. (A past article provides advice for managing working capital with customers who have long payment terms.)
Many businesses operate with tight cash flow, so receiving money promptly is crucial. For some companies, slow payment from customers means a larger balance on their loan (or on the business owner’s credit card), which translates into interest expense. Even worse, some small businesses are maxed out on their credit lines or have no credit, so slow payment limits the company’s growth. Either way, it’s vital to collect quickly.
The second opportunity comes from setting prices too low, Krieger says. After his company buys a business, he often begins a conversation with the CEO about raising prices. Quite predictably he hears, “You don’t understand our business.” Nobody wants to risk losing customers, but more often than not the company is providing good value and the buyers recognize that. After finally raising prices, it takes a while to see whether customers continue to buy. After a couple of months (or whatever the appropriate time lag for the particular business), it’s usually obvious that the price increase was a good move. Then Krieger starts encouraging another price increase.
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Not every small business can raise prices without losing customers, but it’s certainly something to consider. When chatting with the owner of my favorite restaurant I pointed out that his prices were pretty high. He shrugged his shoulders, gave a little smile and replied, “People are willing to pay.” His restaurant was full, demonstrating the truth of that observation.
Instead of focusing on lost sales, business owners should focus on the value to the customer. Krieger advises owners and managers to stand up for what they produce, strive to deliver the best possible product and charge for its value.
Being too tolerant of low-performing employees was Krieger’s third opportunity for improvement. He cited the case of a company that kept an employee who was often late to work and usually rude to co-workers. The company’s CEO said that the worker knew how to do the job well. But there are other people who know how to do the job and who show up reliably and work well with colleagues.
When people are asked what they like most about their jobs, they often reply their co-workers have become friends. But when a co-worker is a jerk, the job is less likable. It’s even worse when the jerk’s behavior forces others to spend time fixing mistakes or covering for the absent employee.
Accepting poor performance changes the company culture so that quality and productivity are less important. A lousy employee not only does lousy work but also infects other employees with the idea that lousy work is acceptable.
Even nice guys can be poor performers. Tolerance of the poor performer sends a signal to other workers that performance does not matter even when the person is likable.
Managers generally hate to fire people. It’s the worst part of the manager’s job. In a tight labor market managers also worry about finding a replacement and whether the replacement may be worse than the original employee. Bosses, however, have a range of options before firing someone. Honestly talking to the employee is a good first step. That leads to the second step: evaluating whether the employee can do better or is hopelessly unable to ever do a good job. When a worker simply lacks the ability to do a good job, it’s a kindness to acknowledge that and either find another position for the person or exit the worker as gently as possible. This tends to be the unusual case. More typically, poor performers are not trying very hard. Setting clear expectations and monitoring performance are the next steps for such people. Firing someone is a lot easier for the boss when the worker has been told clearly what expectations are, trained and provided the appropriate tools, and still has not performed. Managers never, ever, say that they fire people too soon.
Running a small or medium sized business is not easy. Considering these three opportunities, collecting payments, setting prices and getting good employee performance, can help a business succeed.