Grow Your Small Business the Right Way

Even if it means turning away business.

To create a business capable of blossoming for years, you'll have to prune it from time to time. Working with customers or offering products that can't achieve healthy profit margins can sap time and stifle growth, says Nat Wasserstein, managing director of Lindenwood Associates, which helps turn around small and midsize businesses.

So thin out ventures and customers that bleed your energy.

1. Figure out which services are worth it

Giving clients what they want is important, but it should never be your only criterion for the products or services that you provide.

When architect Bruce Wentworth considered expanding his 12-person company -- Wentworth Inc. in Chevy Chase, Md. -- he thought about what his firm excelled at: combining transitional-style interior design, which blends modern and traditional finishes, with detail-oriented construction. And he discovered there isn't enough profit in projects below $50,000.

"By the time we get involved in design, construction drawings, pricing, and permits, it's not the most efficient use of time," he says. The firm's sweet spot is in the mid- to high-end market -- kitchen remodeling, for instance, ranging from $70,000 to more than $300,000.

2. Rank your customers by their "value"

Pay attention to the quality of your clients: Are they high or low profit? Are they high or low maintenance? "You want to retain those customers who represent your highest profit margin," says Yoon Cannon, founder of Paramount Business Coach, a small-business consulting firm in Pennsylvania.

Even better: Find ways to cultivate more business from those clients.

Start by calculating the "value" of each customer, according to what they bring in annual profits, revenue, and effort. To do that, use the worksheet on the next slide. Then rank them, and focus like a laser on the top 20%.

3. Prioritize potential clients too

In 2008, Harry and Barb Haagen, who run a house-painting company with six employees, began to worry when sales dipped by more than 10% in the economic downturn.

The couple, from Doylestown, Pa., came up with a counterintuitive fix: They looked for ways that they could winnow the business even more. Harry recognized his strength was in craftsmanship, not low-cost jobs.

So Barb, who handles the phones, began screening callers. To those interested only in price, she explained the added value Harry provides.

If that didn't hook them, she moved on, freeing up time to focus on customers willing to pay for premium services. The strategy has paid off: Sales are up 15% this year.

To determine which clients are most valuable, score them not just on profits, but on profits per effort, says business coach Yoon Cannon.

Use the worksheet below to calculate each customer's score value -- then rank them, with the highest being the best.

VALUE SCORE

WORKSHEET

Total revenue from Client X: $____________
Cost of acquiring client*: $____________
Total job costs**: $____________
Profit for Client X: $____________
______________________________

Total hours worked: _____
Profit per hour: _________
_____________________________
Relationship bonus:*** +_____
_____________________________
Value: $_______

* Tally up all the marketing costs: direct mail, presentations -- even wining and dining.
** Include only materials, mileage, shipping, and labor (including your own) directly tied to that project.
*** Aggravation counts, but so do frequency of work, length of relationships, and number of referrals they bring. Score clients on a 1-10 scale, 10 being best. Then turn the bonus into a percentage (5 becomes 50% or 0.50, for example) and multiply by profit/hour. The example below is based on a score of 10.

EXAMPLE

Total annual revenue from Client X: $20,000

Cost of acquiring client: -$1,000

Total job costs: -$13,000

Profit for Client X: $6,000

_____________________________

Total hours worked: 100

Profit per hour: $60

_____________________________

Relationship bonus: +$6

_____________________________

Value: $66

Use these online strategies to target clients.

Digital marketing can be a cost-effective way to stand out. Yet a recent survey found that few small-business owners think that using social media (11%) or search engine optimization (6%) is that useful. Don't let such opportunities go to waste.

Follow this checklist:

Choose the right platform: Everyone uses Google AdWords to advertise online, but that can be pricey. The average cost per click in the business category was recently $1.98, according to a study by Adgooroo. For a cheaper alternative (91¢), try the Yahoo Bing Network.

It's no bit player. Yahoo Bing accounts for nearly a third of all online search in the U.S. And while Google generally delivers more ad impressions, Adgooroo found that the lead is not that great in four of six major categories: business, computers, education, and travel.

In finance Yahoo Bing actually leads. Yet costs per click were 23% to 63% cheaper. For B2B firms, LinkedIn is another cost-effective ad platform.

Select the right words: Seeking to grab customers using search engines to find businesses like yours? Incorporate strategically throughout your site words customers are apt to look up, says Heather Lutze, CEO of Findability Consulting & Speaking in Denver.

One way Jeb Brooks, CEO of the Brooks Group, a sales training firm in Greensboro, N.C., identifies those words is simple: He asks clients when he meets them. One recent post on his blog was called "The Value of Public Sales Training: Getting Coaching and Ideas From Outside Your Industry."

Pick the right crowd: Social media is all about finding the right fit. Offer visually oriented services or products? Then Facebook, Instagram, and Pinterest are good places to hang out, says Evan Bailyn, author of Outsmarting Social Media.

Interested in B2B? Then use LinkedIn and SlideShare.net, which let you introduce yourself to clients through posted research and presentations.

Stand out visually: Use some of your Facebook budget to create videos, says Ben Landers, CEO of digital-marketing firm Blue Corona. Research by the social media firm Zuum found that videos were shared 11% of the time, vs. less than 3% for status updates and under 7% for photos.

Track your results: More than half of all small-business owners fail to measure the results of their marketing efforts. So they don't see what's working and what's not.

Yet for just $200, Landers notes, you can hire a developer to customize the free Google Analytics program for you to identify the precise channel through which each visitor came to your website.

Be relentless when it comes to preserving your cash.

If you grow faster than planned, even a momentary cash crunch can have a lasting effect.

"Not stocking enough cash is probably why the majority of firms go out of business," says Bill Klein, president of Consero Global, a financial consulting and outsourcing firm that works with small and midsize companies.

To avoid a cash crunch, take a page from SpareFoot, an online search firm based in Austin that is trying to become the Hotels.com for self-storage space.

1. Monitor your cash flow maniacally

Part of making your firm attractive to a lender down the road is ensuring that there aren't wide gaps between money flowing in and out. At SpareFoot, owners check their cash flow statement every day.

Then they do something rather unusual: They let all of the company's 88 employees look at those financial reports too, says CFO Lucas Walters. That way, when it comes to spending decisions, "everyone on the team is rowing in the same direction" -- and focused on savings, he says.

John Egan, editor-in-chief of SpareFoot's website, agrees. "Because we know the financial situation and feel like we have a stake in it, we are careful with how we spend our money," he explains. "If I have to book a plane ticket, I'll look for the best deal. Why wouldn't I?"

2. Keep staffing costs as low as possible.

Since labor is one of your biggest expenses, maintaining tight cost controls over your payroll will go a long way toward protecting your cash. Sure, you can always hire full-time staffers now and lay them off down the road should business slow. But that approach can get expensive, says Jaime Klein, president of Inspire Human Resources.

SpareFoot's owners avoided this by relying when they could on temporary workers and by outsourcing early on. When the company did need to add permanent employees, it tried them out for 90 days -- without benefits -- before committing.

Today, as SpareFoot plans to increase its workforce to 96 by year-end, "we still evaluate every position to determine what solution makes sense, including outsourcing," says Walters, who himself started out as an outsourced CFO for the firm before joining permanently later on.

3. Line up financing before you expand

The time to position yourself for a low-interest bank loan isn't when you're running out of money and struggling, says Klein of Consero Global. Obtaining credit is a lot like landing new customers. You have to invest time and effort to build a real relationship with potential lenders -- and you have to cast a wide net.

SpareFoot's owners did just that. They kept deposits in several local banks for years knowing that they'd eventually need financing for expansion. That day came in 2012, when the firm required a seven-figure loan to pay for two acquisitions (one of which it did not complete). By maintaining relationships with lenders for years, says Walters, "we got the loan on more favorable terms than we could have otherwise."