Tag Archives | customers

Commercial Agent

See Also:
Agency Costs
Lease Term
Logistics Chain
Gross Up

Commercial Agent Definition

Commercial agent is defined as a person who finds customers for a company who has hired the commercial agent. A commercial agent is both a job as well as a business. They find prospective customers for a variety of businesses, from commercial real estate companies to oil pipeline product manufacturers, so commercial agents function as independent salespeople. Commercial agent compensation is usually paid a commission for each product which they have sold.

Commercial Agent Explanation

Explained also as a private salesperson, a commercial agent is useful for many business to business companies which are trying to increase sales. Due to the fact that commercial agent fees are paid on the commission from each sale, they only form a cost after they have created client income. This makes commercial agents very useful: the only time they draw from company finances is when they contribute to them. The method commercial agents operate with ensures that they only increase firm value. There are exceptions to this, however, as with a commercial agent salary, signing fee, or maintenance fee for keeping agents on a project. Still, they often create less of a cost than a salaried salesperson.

Commercial Agent Example

For example, Sayid is a commercial agent who specializes in commercial real estate deals. Rather than spending some of his time completing deals and the associated paperwork, Sayid chooses to focus his efforts on his expertise: finding and selling clients. He has chosen a career where he can maximize his efforts for as long as he can stay productive.

Sayid has recently found a client who wants to purchase several spaces in a strip center to create a large store which sells finely crafted rugs. Sayid wants to make this deal work for all parties. Then he can gain his commission while expanding his reputation.

He needs to do this quickly so that the customer can begin the process of opening their store. The problem with this is that the seller of real estate is taking longer than expected in hopes of finding a higher bid on the property.

Because Sayid is not an employee for the commercial real estate company, he can use methods which may not be available to an employee. Sayid enters the office of the real estate firm and speaks with the CEO of the company. Rather than acting as an employee, Sayid can negotiate on a different level because he is a contractor. He emphasizes that slowing on this deal will reduce his ability to find other buyers, causing total income for the real estate company to decrease. Sayid has more power of persuasion as a performance-based contractor than as an employee who takes salary and commission.

Sayid is able to complete the deal in a way that benefits both vendor and purchaser. He appreciates his position and realizes that he made the correct career decision when he began years ago.

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Value Drivers: Building Reliable Systems

See Also:
Value Chain
Valuation Methods
Responsibility Center
Cost Driver
Asset Market Value versus Asset Book Value

Value Drivers: Building Reliable Systems to Sustain the Growth of the Business

If your objective is to sell your company for the highest possible price, then you must build reliable systems that can sustain the growth of the business. Before we get started on discussing this important value driver, here are a few quick definitions:

  • Systems refer to a group of related processes.
  • Processes have purposes and functions of their own and are components of a system. Taken independently, a process alone cannot do the work of a system.
  • Procedures are the approved way we do things and often include a sequence of steps.
  • Steps are the actions we take to get something done. A solid management team is one of the first important value drivers to focus on when preparing your business exit. In addition to building a strong management team, you also must build reliable operating systems that can sustain the growth of the business. The second value driver is the development and documentation of business systems that either generate recurring revenue from an established and growing customer base or create financial efficiencies. For most businesses, this includes all of the core processes that generate revenue or control expenses. These systems may include processes related to production or service delivery. But it also may include people-related processes such as a succession planning or a performance management approach.

Look at your business from a buyer’s perspective. If you leave shortly after a sale, then what remains? If the answer is top management and highly efficient business systems, then you can be more confident that you will be able to get top dollar for your business.

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Business Systems Related to Customers

In addition to the business systems related to revenue and expense, some systems are related to customers, such as tracking systems, and the delivery of your products and services such as distribution systems. The documentation of these systems and their related processes and procedures is important to ensuring that quality and consistency can be maintained after the sale. They also signal to the buyer that everything is in place for their future success. Some examples of items worthy of documentation are:

  • Financial control systems and accounting policies.
  • Policies to ensure compliance with legal and regulatory matters, especially those related to employer/employee relationships and safety.
  • Data management and information systems that tie the company together

Again, put yourself in the shoes of a would-be buyer. Buyers want assurance that the business will continue to move forward after new ownership and that operations will not break down if and when the former management leaves. Obtain this assurance when there are documented systems in place that will enable the buyer to repeat the actions of the former owner to generate income and grow the business.

Examples of Business Systems

There are several business systems, which enhance business value whether you plan to sell your business now or decide to keep it. These systems include:

  1. Human capital management including: recruitment, selection, hiring, and retention; performance management; training and development; compensation and benefits.
  2. Production including product or service quality control and improvement.
  3. Product or service research and development.
  4. Inventory and fixed asset control.
  5. Sales, marketing and communications.
  6. Procurement including the selection and maintenance of vendor relationships

Obviously, appropriate systems and procedures vary depending on the nature of a business. But at a minimum, document those resources and activities necessary for the effective operation of the business. After you have built reliable systems to sustain the growth of the business, the next value driver to focus on is establishing a diversified customer base. We will discuss this value driver in detail in the next Exit Planning Review™ Article.

If you have any questions about increasing the value of your business prior to your exit, please contact us to discuss your particular situation. We can help guide you through the process of identifying the current value drivers in your business and creating a road map for increasing value to meet your overall exit objectives. Download the Top 10 Destroyers of Value whitepaper.

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Bank Charge

See Also:
Fixed Charge Coverage Ratio Analysis
5 C’s of Credit (5 C’s of Banking)
Categories of Banks

Bank Charge Definition

Bank charge, defined as the fees associated maintaining a bank account, exist in the personal as well as business world. These charges come from two factors. First, regular account maintenance is perhaps the most common. Additionally, fees due to violations of agreements, bank charges for insufficient funds as an example, also occur.

Bank Charge Explanation

Bank charge, explained as the common fees from banking, form the most common costs of maintaining accounts. For normal accounts, banks may charge fees such as monthly or yearly account maintenance fees, transaction fees, transfer fees, and more. For violations, bank charges for businesses may be caused by undergoing the minimum balance, insufficient funds, minimum savings amounts, and more.

The reason bank charges exist is so that banks can maintain reliable customers. These fees are levied to discourage bad policies which, if compounded, result in issues with the bank itself. Bank charge refunds may be given but are uncommon due to corporate policies.

Bank charges can be the result of other situations with a bank. It is important to understand the agreement made with a bank upon creation of a business or personal account. Additionally, account holders will want to educate themselves on bank policies regularly to be abreast of new policies, changes, and other amendments.

Bank Charge Example

Jonah is the manager of a branch of a major bank. As the manager, he has a variety of responsibilities from managing employees, monitoring performance, creating and maintaining branch policies, upholding corporate policies for both workers and account holders, and processing major transactions. Jonah has much to do when he shows up to work each day.

Jonah must now decide on how to uphold policies with an important business account holder. In this situation, the account owner was charged for insufficient funds. The problem with this is that the company deposited a check to cover this, however the check came at the end of the work week. The bank does now process checks on the weekend. Though a bank charges complaint letter has been sent to the corporate office Jonah must make the final decision.

Jonah meets with the company account manager. This man, one of the controllers of company finances, makes multiple cases to attempt to gain the funds lost from this accident. Despite this, Jonah can not give the company a break. Corporate policies dictate that Jonah must maintain his stance.

Jonah is able to compromise by waving the monthly account fees. This is able to soften the blow of the mistake. Jonah wants to make sure to keep happy customers and maintain good word-of-mouth. Overall, he is successful at this. Jonah leaves work happy that he was able to provide some value to his customers.

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Can Factoring Be Better Than A Bank Loan?

See Also:
What is Factoring Receivables
The Dreaded “F” word
Accounting For Factored Receivables
Journal Entries For Factored Receivables
Working Capital
Preparing a Loan Package

Can Factoring Be Better Than A Bank Loan?

What I have found is that normally a business owner who needs financing for the growth of their business start their financing search by looking for a business loan or a business line of credit from a bank. The reason is that business loans and lines of credits from a bank are well known products. However, due to the regulations imposed on the banking industries loans are very hard to get. What I have found in the real world is few businesses actually manage to get them unless they are collateralized by equity in real estate or equipment.

As a result, the accounts receivable and inventory financing needed in a growth mode is the most difficult financing to obtain from a bank. There is an alternative for such growth needs, which is factoring. Factoring is offered by commercial finance companies. In the vast majority of cases, factoring may be a better and easier solution to obtain than traditional bank financing to fund the growth of a business.

Determine if Factoring is the Better Alternative

To determine if factoring is a better alternative than a business loan you just need to ask yourself these questions:

1. Does my company provide goods or services that are completed when I invoice my customers?

2. Are my customers not paying within the credit terms I am offering?

3. Are you turning away sales because you do not have the cash?

4. With cash, is your business growth potential greater than 20%?

If your answers were yes to these questions, then factoring your accounts receivable invoices is better for you than a traditional loan that you can obtain from banks. Accounts receivable factoring provides a business with financing flexibility based on your sales. A properly structured factoring program eliminates slow payment cycles by providing your business with cash to grow your business.

As a business owner, you should be aware and open to all financing products available to you by either a bank or commercial financing company and choose the one that best fits your company’s needs.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

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Buyer Bargaining Power (one of Porter’s Five Forces)

See also:
Porter’s Five Forces of Competition
Threat of New Entrants
Intensity of Rivalry
Threat of Substitutes
Supplier Power
Supplier Power Analysis

Buyer Power Definition

Porter’s Five Forces of buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. When analyzing the bargaining power of buyers, conduct the industry analysis from the perspective of the seller. According to Porter’s 5 forces industry analysis framework, buyer power is one of the forces that shape the competitive structure of an industry.

(See the other Porter’s 5 forces of competition.)

The idea is that the bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability. Strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease profit potential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price, makes an industry less competitive and increases profit potential for the seller. The concept of buyer power Porter created has had a lasting effect in market theory.

Conducting an industry analysis can be overwhelming and confusing. Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market. 

Buyer Power – Determining Factors

Several factors determine Porter’s Five Forces buyer bargaining power. If buyers are more concentrated than sellers – if there are few buyers and many sellers – then buyer power is high. Whereas, if switching costs – the cost of switching from one seller’s product to another seller’s product – are low, the bargain power of buyers is high. If buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high. If the consumer is price sensitive and well-educated about the product, then buyer power is high. Then if the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high. If substitute products are available on the market, buyer power is high.

And of course, if the opposite is true for any of these factors, buyer bargaining power is low. For example, low buyer concentration, high switching costs, no threat of backward integration, less price sensitivity, uneducated consumers, consumers that purchase specialized products, and the absence of substitute products all indicate that buyer power is low.

Buyer Power – Analysis

When analyzing a given industry, all of the aforementioned factors regarding Porter’s 5 Forces buyers power may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high buyer bargaining power and some may indicate low buyer bargaining power. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

Buyer Power is High/Strong if:

• Buyers are more concentrated than sellers

• Buyer switching costs are low

• Threat of backward integration is high

• Buyer is price sensitive

• Buyer is well-educated regarding the product

• Undifferentiated product

• Buyer purchases product in high volume

Substitutes are available

• Buyer purchases comprise large portion of seller sales

Buyer Power is Low/Weak if:

• Buyers are less concentrated than sellers

• Buyer switching costs are high

• Threat of backward integration is low

• Buyer is not price sensitive

• Buyer is uneducated regarding the product

• Highly differentiated product

• Buyer purchases product in low volume

• Substitutes are unavailable

• Buyer purchases comprise small portion of seller sales

Buyer Bargaining Power Interpretation

When conducting Porter’s 5 forces buyer power industry analysis, low buyer bargaining power makes an industry more attractive and increases profit potential for the seller, while high buyer bargaining power makes an industry less attractive and decreases profit potential for the seller. Buyer power is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Many respect the buyer power Porter’s five forces.

Start preparing your external analysis so you can react in realtime when the buyer’s have bargaining power over your company. Don’t loose out because of an external force. Download the free External Analysis whitepaper by clicking here or the image below.

buyer bargaining power, buyer power

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Can You Build Success by Narrowing Your Customer Base?

I recently read an interesting Business.com article by Art Saxby. Art Saxby is the founding principal of Chief Outsiders. In this article, he talks about how to achieve success by narrowing your customer base.  Sounds counter-intuitive… But how many firms tie up valuable resources catering to high-maintenance customers who often don’t stick around in the long run?

Can You Build Success by Narrowing Your Customer Base?

Here’s an excerpt from the article:

Achieving success by narrowing your customer base?

It sounds counterintuitive, but many small- to mid-size businesses can achieve higher profits and more success by downsizing the base of customers they serve.

Creating the perfect situation in which you and your customer base share common goals, respect, and appreciation can alleviate personal and professional stress and allow your business to grow.

Identifying Positive and Negative Customers

Some customers can boost your profits. Others can break your bank. If you don’t know which are which, you’re jeopardizing your business. Many companies could significantly increase profits overnight by either firing troublesome, unprofitable customers or ratcheting the price up so unprofitable customers leave or become profitable.

  • Positive customers truly understand and appreciate what you do. They’re willing to work with you and pay a fair rate for the product or service they receive. When you compare the revenue you receive from these clients to the time spent for their continued business, you should find a fair and practical balance.

While every customer or client cares about price, your positive customers understand the value you bring to their businesses. You understand the issues they have with growing their businesses and you talk to them about ways you can help; they, therefore, understand and value what you do.

  • Negative clients, on the other hand, can tax both your business’s operations and finances. For many companies, there’s a constant push to sell whatever can be sold to whoever will buy it. The business appears successful, and salespeople and operations stay busy in this scenario.

However, these customers can actually cost your company money, without really understanding or valuing the benefits of the product or service you provide. Your sales team might have lured these customers in with big price discounts or unrealistic delivery commitments to close the initial sale.

Negative customers often kill profitability by tying up valuable resources, like customer service time, engineering, or inventory. In many cases, these high-maintenance customers leave before you even recover your startup costs.

When is it Time to Narrow Your Base?

One of the biggest clues that your company is spreading its net too broadly in terms of customer base is when most new sales are closed due to low prices and discounting. To sell to a wide audience, a product or service must have broad appeal.

However, if everybody likes your business, but nobody loves it, you are forced to compete on price. By trying to reach everyone, you meet a bit of everyone’s needs, but not enough of anyone’s specific needs for them to pay you a premium. It’s also possible you’ve loaded up your product/service with things customers don’t care about and aren’t willing to pay for.

Analyze Your Sales Team’s Invested Time

Analyze your sales team’s invested time. This process can reveal which customers take up the majority of your business’s efforts. Often, a salesperson will cater to certain companies or segments and have specific product lines she likes to push. It’s a natural tendency to gear your efforts toward your interests, but this approach can really inhibit a company’s growth.

The likes and dislikes of a salesperson can actual control a company’s growth. If everyone is only focusing on what they consider their specialties, productivity and shared goals can suffer.

Focusing on price versus quality, and on isolated sales efforts versus a unified vision, can weaken your customer service and profit potential.

Companies can increase profitability by avoiding unprofitable customers. Clients only interested in price are often unfit for long-term business relationships.

The original article can be found here.

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Narrowing Your Customer Base

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Do You Know Who Your A-List Customers Are?

Do you know who your A-list customers are? I was in a board meeting last week when I heard an interesting story from one of the other board members. Mike recalled when he was a young man and developed an interest in electrical work. While continuing to work at his day job, Mike developed a skill for doing light (pardon the pun!) electrical work.

As time passed, the demand for Mike’s work increased. He would do odd jobs for people on the weekend and at night. He would install flood lights, ceiling fans and fixtures. In addition, friends and family would request favors which he was happy to do! As the request started pouring in Mike started keeping two lists; one for paying customers; the other for favors.

One day his brother-in-law asked if Mike would do a favor by installing a flood light for his father-in-law. Mike agreed and put the name on the list. Several months went by and the brother-in-law had not heard from Mike. When he asked Mike why he had not installed the light, Mike explained his two lists.

The first list was the A list. This list consisted of paying customers. The B list was for favors. Mike was happy to start working on the B list as soon as he had completed the A list. The brother-in-law thought for a moment, then said that he would like to be moved to the A list.

Do You Know Who Your A-List Customers Are?

Often, we lump our own customers together. We treat the loyal customer who pays promptly the same as the demanding customer who is never happy and pays slow! In fact, it is often the demanding customer who gets more of our attention.

The lesson of this story is that we should have an A list and a B list for our customers. The A list should consist of those customers that pay on time, value our services and refer our name. The B list is for customers that don’t value our services, dispute our fees and are late or slow paying our bills. We should constantly be increasing the length of the A list and shortening the B list.

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Do You Know Who Your A-List Customers Are?

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Do You Know Who Your A-List Customers Are?

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