I was reminded whilst talking to a client this week of the phrase “not all new business is good business”. It was taught to me very early in my career and has been one of the best pieces of business advice I’ve ever received.The client in question (let’s call him Bob) had taken on what looked (on paper) like a great project from ABC ltd. Looking purely at the levels of revenue it would bring, his company’s turnover would be up significantly. They were as happy as happy could be.
Then the problems started…
The emotional Vampire
Initially, everything went well. Bob started working for ABC and did a really great job of keeping ABC happy for the first few weeks. However, ABC became more and more demanding and started to “scope creep” in the project. (Scope creep is the term used to describe when someone adds what they hope will be ‘free extras’ to what they originally agreed to, with a supplier.)
At first, Bob didn’t mind throwing in the odd extra to keep the client happy. However, as time wore on, ABC started to become an emotional vampire to Bob – they sucked his energy right out of him.
Their demands became ever more ridiculous. They’d call him at all hours, demanding changes and updates, all at no extra cost! His existing clients became increasingly frustrated, as the levels of service they received dropped, now that Bob was concentrating more and more on ABC limited.
Bob and I sat down and reviewed the project. He’d done quite a lot of the right things at the beginning of the project. He’d worked out a price based on the resources he thought he’d need for the project (this is in an industry where hourly rates are the norm). He had analysed the time that would be needed and when he would need to be working on the client. He told ABC ltd what the end date of the project would be, what the different stages where in getting to that end point and what input would be required from them.
What he hadn’t done was to be specific enough about what wasn’t included in the project and how any extras would be billed!
Turnover is vanity, Profit is sanity
When we looked at the profitability of the project, Bob would be very lucky if he were to break even. In fact, if you include the opportunity costs of potential work he missed out on and factor in the unhappy existing clients, he will have made a LOSS.
Bob still protests that ABC brought him in so much revenue that he couldn’t refuse the work, but accepts that he made a number of mistakes along the way. His primary mistake was not being specific enough in the contract terms. His second mistake was to focus too much on the revenue, without factoring in profitability.
Judging from the number of emails I receive, it seems many businesses have had similar experiences to Bob. More importantly, how can you ensure this never happens to you and your business?
Here are a few suggestions:
• Listen to what potential clients say at opening meetings very carefully. If they try and barter on price then there could be warning signs about future behaviour
• Put together a list of what is included for the price and equally what isn’t. Explain how extras on a project will be billed
• When a client phones with scope creep, make sure you use the line “last time we did that for a client, it cost an extra £x, is that ok with you?”
• Invoice the client as you go for both extras and the original project fee. It’s amazing how extras add up and clients could be shocked with a big bill at the end.
• Get as much as you can in writing. Yes it’s easy to take down some additional details over the phone, but if the client comes back and claims that he didn’t ask for that doing, you’ll be left high and dry
• Always focus on the profitability of a project. Turnover is vanity and profit is reality. So what if a project adds £100,000 to your turnover. If you don’t make any money on it, why bother. It’d be much better for you to spend the day at home!
Your breakeven point is that point in time when your income equals your expenses. Once you get past that point and your income exceeds your expenses, then you are making a profit. If your expenses exceed your income, then you are making a loss.
HMRC confirmed last month that it is phasing out paper VAT returns. From April 2010, if your busienss turnover is greater than £100,000 or you are newly VAT registered, you will have to complete and pay your VAT online. Those business who fall out of those criteria will still be able to file a paper return.
