Ask Dave On Business With Dave Ramsey

Time to collect

1. Dear Dave,

I have a small business doing work on houses. We have lots of repeat business, but sometimes people don’t pay, and we have to drop them as customers. Do you have any advice for avoiding these situations?

— Steve

1. Dear Steve,

Virtually every small-business owner runs into this problem. The truth is collecting isn’t a customer problem; it’s a sales problem on the part of the business.

When we sell advertising for my radio show then have trouble collecting, it means we sold the account improperly. Now, what is a properly sold account? A properly sold account is one in which we approached a qualified customer who had money, and the relationship was constructed in such a way that they realized from the beginning paying us on time was an important—even vital—part of the relationship.

When we sit down with potential advertisers, we make it clear that we will bill them exactly on the 25th of the month. We also stress that we expect to be paid within five days. If we don’t have your payment by the first of the next month, you’ll be getting a phone call. Then, if you don’t respond to the call by the 15th, you won’t advertise with us ever again.

That may sound harsh, but I believe a thorough understanding is essential in all business transactions. It keeps things professional and eliminates a lot of unnecessary stress for you, your team and your bottom line!

— Dave

Managing a cottage industry

1. Dear Dave,

I work full-time as a guidance counselor at a high school, but I bake and decorate cakes on the side. Word about my cakes has gotten around, and the demand has really grown. Now I’m being asked to do weddings and lots of other big events. I want to keep my business small, and I’m not sure how to handle things now.

— Jamie

1. Dear Jamie,

It’s great that demand has risen, but I can understand how that could also be a burden in your situation. Trying to keep a side business from blossoming into a full-time job can be a good problem to have though. It means people really like what you’re doing.

I’d suggest two things if you’re absolutely sure you want to keep this business small and maintain it as a cottage industry. First, you need to raise your prices. Some people will decide not to be customers any longer, but that’s okay. You might not have quite as many clients, but you’ll make more per cake.

The second thing is to be selective about the people with whom you choose to work. Even if things have picked up lately, you’re still not doing a big enough volume to put up with a lot of attitude from spoiled customers. If a Bridezilla walks through the door, you can simply choose not to work with her.

That’s my advice, Jamie. Select your clients carefully and raise your prices. I think you’ll get more enjoyment—and more money—out of your business that way!

— Dave

Know what you’re buying when you’re buying

1. Dear Dave,

I have an opportunity to buy a small business. What should I look for, and what things should I check on before I make my decision?

— Al

1. Dear Al,

The first thing you have to be absolutely certain of is that you’re going to wake up every morning and be excited you get to go to work again. Business owners must be passionate about their line of work, because they’re going to be involved in each aspect of it every single day. Your vocation needs to be a vacation. Otherwise, it becomes a constant grind, and when that happens you’re in trouble.

As far as buying a business is concerned, you’ll want to take your time and really dig into things. In many ways, a business is only worth the income it creates, and just because it has a great location doesn’t mean you’ll make money. Who cares if they have a great name in the community if the business doesn’t generate an income? The same thing goes for having a brand everyone knows. If they’re not monetizing it, who cares? It all comes down to the net profit of the business.

Sometimes people buy businesses on multiples of gross sales before expenses. You may know enough about that particular business to understand that you run it for a certain number of percentage points of the gross. In that case, you’ll know what your profit will be. But most of the time when buying a small business, especially if you’re a rookie, you need to concentrate on gross revenue, expense details and the profit generated as a result.

Once you’ve done that, you’ll want to ask what you will make on your money. If you’re going to take on the risk of a small business, you want to be able to make at least 20 percent on it. In other words, if you buy a business for $100,000, it needs to make at least $20,000 a year.

The least it’s worth is called book value. Once you own the business, if you collected all the receivables, sold off all the equipment and inventory, then closed the business, what would you have in your pocket? That’s the book value. If the current owner has $40,000 in inventory, $30,000 worth of equipment and $30,000 in receivables, the book value would be $100,000 just if you close it. Those are your floor and ceiling values. Somewhere in between you’ll find a fair price.

And remember this: If someone says a business does $65,000 a year, but they only pay taxes on $40,000, that means all they made was $40,000. If they don’t report it to the government, it doesn’t count. Don’t pull that under-the-table kind of stuff. A business is worth what is reported to the government, so take a good, hard look at the tax returns.

Lastly, do some research and find out if there’s someone in the same business, in another city, who would mentor you for a while. It just might be worth the price of a plane ticket to pick their brain and just listen to what they have to say. Chances are if they’ve been in business for a while, they know the ins and outs of the industry.

Good luck, Al!

— Dave