Every small business owner must ask, “how do I get customers to pay me”? Some ask “how do I get them to pay me what my goods are worth?”
At the NYT/ AMEX OPEN Summit Conference yesterday, we gave some small business advice at the Financial Bootcamp session in the afternoon.
One small business owner was struggling with cash flow. Here’s why…
The small business owner is an interior designer who manufactures mirrors and sells them to small home goods stores and Bed Bath and Beyond which is her largest client.
Here’s the challenge with doing business with any large retailer.
Buyers place large orders so they know they have negotiating leverage when it comes to price and payment terms.
Deep discounts can kill cash flow and no, you can’t make it up in volume if gross margin is too low!
But if your products sell like hotcakes, you have a lot more leverage with the retailer than you think, even if you’re a small business.
Here are the current terms this small business owner has to deal with:
Bed Bath and Beyond takes a 10% “early payment” discount off the top. If you wholesale something normally for $100, this discount means Bed, Bath and Beyond will be paying $90.
Next, they take various other discounts under odd names like “charge backs for mislabeling goods” that were shipped even though the labels meet specification. The list is endless. So are the discounts.
The charge backs alone accounted for over 15% of of the value of the invoice.
When you add it all up, Bed Bath and Beyond was taking over 25% in discounts over the regular wholesale price. A $100 item is now only selling for $75 at wholesale.
That meant the supplier was going to be losing money by definition because the discount ate up most of her gross margin or gross profit.
The rule of thumb is, if your gross margin falls below 30%, you will not be able to cover your expenses. It won’t pay for you to be in business.
Here’s the small business advice we gave the small business owner:
Step 1) Find out what the average sales per square foot is for the stores you’re in. That gives you a benchmark for comparison.
Step 2) Now find out how much space in square feet your products occupy in the store. Stay with me, this is going somewhere important!
Step 3) Look at your monthly store sales, take an average and divide it by the square feet. Now you know how your goods are selling per square foot versus the overall store.
Step 4) The retailer lives and dies by these “sales per square foot” numbers. You should too. In this case, her goods were selling far better than average store sales.
Step 5) Now she has leverage to open up the discussion that Bed Bath and Beyond needs to throttle back on all those discounts and charge backs if they want access to her “hot cake” products.
Step 6) Bed Bath and Beyond is making real money on her products. She can prove it by comparing her products sales per square foot with overall store sales per square foot.
Step 7)If the store decides to drop the line, it will lose a real winner. They won’t be able to replace those above store sales that easily. They know this. Now the small business owner does too.
In the middle of a recession, every retailer needs products that sell well.
If you can prove your products sell through, you have more power than you realize.
Doesn’t it feel great to negotiate from a position of strength?
The larger question of course, is if the small business owner can survive without Bed Bath and Beyond revenues. The short answer she gave me was, yes, she can.
That’s a beautiful thing. Now Bed Bath and Beyond doesn’t have a choke hold on her small business survival.
Diversify your customer base and no one customer could hold your business hostage.
If you need help, hit the “Panic Button“. Our live help desk is here to help small businesses and its FREE for now.
Don’t forget to follow me on Twitter @bestbizhelp @dfotopulos and LinkedIn.
In your corner, as always,
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