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In principle, customer value is a very simple concept. It is the difference between the benefits

that a customer receives from a product or a service and the costs associated with obtaining that

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product or service.Total customer benefit refers to the perceived monetary value of the bundle of

economic, functional, and psychological benefits customers expect from a product or a service

because of the products, services, personnel, and images involved. Total customer cost, the

perceived bundle of costs that customers expect to occur when they evaluate, obtain, use, and

dispose of the product or use the service, include monetary, time, energy, and psychological

costs. [2] In short, it is all about what customers get and what they have to give up.

In reality, the creation of customer value will always be a challenge—particularly because it

almost always needs to be defined on the customer’s terms. [3] Nonetheless, “the number one

goal of business should be to ‘maximize customer value and strive to increase value

continuously.’ If a firm maximizes customer value, relative to competitors, success will follow. If

a firm’s products are viewed as conveying little customer value, the firm will eventually atrophy

and fail.” [4] This will certainly be true for the small business that is much closer to its customers

than the large business.

The small business owner needs to be thinking about customer value every day: what is offered

now, how it can be made better, and what the competition is doing that is offering more value. It

 

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is not easy, but it is essential. All business decisions will add to or detract from the value that can

be offered to the customer. If your product or service is perceived to offer more value than that

of the competition, you will get the sale. Otherwise, you will not get the sale.

Cash Flow

Revenue is vanity…margin is sanity…cash is king.

Unknown.

Most people would define success with respect to profits or sales. This misses a critical point.

The survival of a firm hinges not so much on sales or profits, although these are vitally

important, as it does on the firm’s ability to meet its financial obligations. A firm must learn to

properly manage itscash flow, defined as the money coming into and flowing from a business

because cash is more than king. It is a firm’s lifeblood. As the North Dakota Small Business

Development Center put it, “Failure to properly plan cash flow is one of the leading causes for

small business failure.” [5]

An understanding of cash flow requires some understanding of accounting systems. There are

two types: cash based and accrual. In a cash-based accounting system, sales are recorded when

you receive the money. This type of system is really meant for small firms with sales totaling less

than $1 million. Accrual accounting systems, by contrast, are systems that focus on measuring

profits. They assume that when you make a sale, you are paid at that point. However, almost all

firms make sales on credit, and they also make purchases on credit. Add in that sales are seldom

constant, and you begin to see how easily and often cash inflows and outflows can fall out of

sync. This can reduce a firm’s liquidity, which is its ability to pay its bills. Envision the following

scenario: A firm generates tremendous sales by using easy credit terms: 10 percent down and

one year to pay the remaining 90 percent. However, the firm purchases its materials under tight

credit terms. In an accrual accounting system, this might appear to produce significant profits.

However, the firm may be unable to pay its bills and salaries. In this type of situation, the firm,

particularly the small firm, can easily fail.

There are other reasons why cash flow is critically important. Firms need to have the money to

buy new materials or expand. In addition, firms should have cash available to meet unexpected

contingencies or investment opportunities.

 

 

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Cash-flow management requires a future-focused orientation. You have to anticipate your future

cash inflows and outflows and what actions you may need to take to preserve your liquidity.

Today, even the nonemployee firm can begin this process with simple spreadsheet software.

Slightly larger firms could opt for the user-dedicated software. In either case, cash-flow analysis

requires the owner to focus on the future and to develop effective planning skills.

Cash-flow management also involves activities such as expense control, receivables

management, inventory control, and developing a close relationship with commercial lenders.

The small business owner needs to think about these things every day. Their requirements may

tax many small business operators, but they are essential skills.

• Expense control requires owners or operators to think in terms of constantly seeking out efficiencies and

cost-reduction strategies.

• Receivables management forces owners to think about how to walk the delicate balance of offering

customers the benefits of credit while trying to receive the payments as quickly as possible. They can use

technology and e-business to expedite the cash inflow.

• Effective inventory control translates into an understanding of theABC classification system (sorting

inventory by volume and value), and determining order quantities and reorder points. Inevitably, any

serious consideration of inventory management leads one to the study of “lean”

philosophies. Lean inventory management refers to approaches that focus on minimizing inventory by

eliminating all sources of waste. Lean inventory management inevitably leads its practitioners to adopt a

new process-driven view of the firm and its operations.

• Lastly, attention to cash-flow management recognizes that there may well be periods when cash outflows

will exceed cash inflows. You may have to use commercial loans, equity loans (pledging physical assets for

cash), and/or lines of credit. These may not be offered by a lender at the drop of a hat. Small-business

owners need to anticipate these cash shortfalls and should already have an established working

relationship with a commercial lender.

A small business needs to be profitable over the long term if it is going to survive. However, this

becomes problematic if the business is not generating enough cash to pay its way on a daily

basis. [6] Cash flow can be a sign of the health—or pending death—of a small business. The need

to ensure that cash is properly managed must therefore be a top priority for the business. [7]This

 

 

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is why cash-flow implications must be considered when making all business decisions.

Everything will be a cash flow factor one way or the other. Fred Adler, a venture capitalist, could

not have said it better when he said, “Happiness is a positive cash flow.” [8]

Digital Technology and the E-Environment

Digital technology and the e-environment continue to change the way small and large

businesses operate. Digital technology refers to a broad spectrum of computer hardware,

software, and information retrieval and manipulation systems. The e-environment is a catchall

term that includes e-business and e-commerce. The Internet in particular has had a powerful

impact on the demands of customers, suppliers, and vendors, each of whom is ready—perhaps

even expects—to do business 24/7.

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