Success Depends on Knowing What Contracts, P&L Say
This is Part 2 of a multipart series for entrepreneurs and small business owners. Whether you are starting or have been in business for a few years, these insights and personal lessons may save you a load of money and regret.
I call it Blood and Guts because that’s what it takes to be a business owner. You deserve a medal. What most people think is liberation from a 40-hour workweek is often an 80-hour or more workweek, and the rewards are not always financial. Having started multiple small businesses of my own and marketed/consulted with many others over the past 40-plus years, I have seen or personally experienced a lifetime of good and bad decisions. I hope these insights will be valuable to anyone who chooses to take the risk.
In the last installment we covered hiring a good CPA, joining a peer group, avoiding advancing cash or loaning money to anyone, and being careful with partnering. Here are a few more insights in dealing with employees and customers.
Create contracts for commissioned sales people. Look at it this way: When you have to go before a judge, you want the contract to be very clear so there can be only one interpretation. I had a salesperson sue me claiming (1) his pay was commission plus draw instead of draw against commission and (2) he was paid on sales, not collections.
On the first point I was clear in our contract, but on the second, even though we could show multiple months of paychecks indicating pay on collections, that was not clear in the contract. The judge awarded him pay for money we had not collected yet for the 90 days after he was terminated.
Read vendor contracts and make it clear that employees do not have the authority to sign for anything. You can make changes to vendor contracts to suit your needs. The most common contract change is “terms of payment.” Strike through and write in your own. Unless they challenge you, and I never had one to do so, the contract will be filed away and never brought up again. It is usually a formality.
And tell your staff and vendors that the only person who can sign anything is you. One member of my peer group had an employee who signed an order that later cost her company more than $50,000. The client she represented filed for bankruptcy, leaving her holding the bag on a large order, one that she would never have signed off on. Because her employee had signed, her company was held responsible to pay even though she was never paid herself.
Another way to do this is to offer your own PO in place of the one offered by the vendor. It doesn’t always work, but is worth a try.
Don’t finance your customers by running 120 days on collections. This is death! It’s easy to get into a position where you are bullied by a large account. It happened to us.
A major hospital changed officers, and the new one told us it would pay in no less than 120 days. The suppliers we used for the account required payment in no more than 60 days. We were not allowed to pass through any late charges. Unfortunately, they had become our largest account and they knew it.
What do you do? We determined to replace them, because this was a matter of integrity. After four months we gave them notice. Your best bet is to spell out your terms and have them sign off on them so that when there is a change, you are protected.
Read your P&L (profit and loss statement) each month. Look at the general ledger for bogus vendors. If you are on accrual, set up a cash system to see income and expenses. Another large company we worked for had someone in accounting who set up bogus vendors and then submitted invoices just like any normal company. Not until there was an audit did the company catch the thief, after discovering that tens of thousands of dollars had been paid.
If you check the payables each month, you will likely stop this from happening. Look at the income and track the expense accounts before checks are written. We made it a policy to attach vendor accounts to each client so we always knew what we were buying and for whom.
As you grow, this information can get past you unless you have a system to catch issues before they start. If you alone sign the checks, you can watch for bogus or questionable vendors.
Watch for the next part of this series and share this with other entrepreneurial friends. Believe me, small businesses and entrepreneurs need all the help they can get. Got any good stories yourself? Shoot me an e-mail at firstname.lastname@example.org.