Following on from last time, here are some more of the common mistakes that are made by SME’s (small, medium enterprises) and start-ups.
Undercharging for products and services.
This one I certainly can relate to as it was one of the mistakes that I made when I started out and it became a really big problem. You see firstly, the way that you ‘charge’ (especially for services or hourly rates) tells people who you are and even what you think of yourself. Secondly, it all goes to selecting, in part, who your target market is. Obviously, if your charges are too high, or not in line with the rest of the industry, this could also have quite an effect on your turnover and obviously your cash flow.
My biggest problem was that I could not find anyone here in South Africa who was doing what I wanted to do – a great opportunity for me, but a bit of a ‘thumb suck’ when it came to fixing prices and costs. So I used my ‘corporate monthly salary’ as a guideline! What a mistake that turned out to be. I also did not factor in a whole bunch of stuff, such as (but not limited to), that although there are (well there should be) eight working hours in a day, five days a week to get the work done (well that’s what I got paid for in the corporate world) – the reality is that some of those hours will be spent on marketing and finding those clients – you can’t charge anyone for that and some of those hours will be spent on admin – you can’t charge anyone for that either. So the bottom line is that you don’t have 22 days in a month that you can charge out at an hourly rate – more realistically it is around 10 days. Now that sure messes with your calculations.
The second problem was that because I had come in at such a low cost (R200 per hour), I attracted pretty much all the wrong target market. Yes, they were the SME and start-up market, which was exactly where I wanted to be, and yes they were in desperate need of what I was offering, just like it should be – the problem was that they could not even afford to pay me at that low rate.
Instead of cutting my losses and walking away from the problem, I compounded it by becoming all emotional and feeling sorry for them, so I offered them a) discounts if they paid me the cash and b) terms if they couldn’t! Bad move on both elements. By offering them discounts on charges that were already too low, I was not even breaking even and of course, I was telling them that I did not value myself very much and quite frankly if I didn’t value myself very much, why on earth would they value me? Offering them terms . . . well let’s just say that that wasn’t my finest decision, especially as I continued to work for them, even while I was trying to get money out of them for work that had been done months ago. I am sure you can see where that went – they disappeared and I never got paid and it got quite ugly. In my first two years of trading, I wrote off tens of thousands of bad debt that I could ill afford.
Finally, I got over my emotional self, upped my prices considerably and found myself a better quality of client . . . One that could pay. Are my prices still reasonable? Of course, they are, they have to be in order for me to make an impact in my chosen market, but they are no longer ridiculously low.
So this is very important people, you need to make sure that your charges are reasonable enough to evidence good value for money, but you also need to cover all of your costs as well as leave something over as profit. It needs to be looked at very closely and very honestly and more often than not, very brutally.