When we first start a business, the biggest question we often think is, “what should I charge?” We tend to start out where we’re comfortable and confident people will buy.  After a while we may find that we’re making sales easily.  That’s an indication to consider raising prices.  If you also find that you’re working at capacity and losing money, that’s also an indication your pricing (as well as your operations) needs to be reviewed.

What stops most business owners from raising the bar? Fear. Many business owners think that if they raise their prices, it will scare-off their customers and they’ll look to your competitors. Feeling nervous about the adjustment is normal, but consider that in some circumstances, price implies value.  You wouldn’t go to a discount doctor, would you?  You also may find that you do lose a few customers, but if you’re making more profit from the others, and new ones, you may be better off in the long run.

In an ideal world, your business should raise their prices every year. You Should evaluate your pricing annually, taking into account new capabilities your firm has developed, your overhead costs, and the general economy.

Look at media giant Netflix. The company originally had a streaming combo-plan for $10 per month. Soon after, they decided to raise their prices to $16 – that’s a 60% increase! Customers weren’t happy and unfortunately took to social media to complain (Kuadey, 2011). I’m sure there was a strategy behind this – perhaps one big increase instead of a bunch of little ones but do try to avoid this with your business.  If you do want to raise your prices this much, try it with new customers.

Your pricing sets the tone of the kind of company you want to be and the type of customers you are looking to have. For instance, if you are known for your low-cost pricing – customers typically won’t expect high-end customer service. If you have higher-pricing – customers will expect all the bells and whistles for what they’re paying.

Here are a few reasons to help make your decisions easier:

• Growth – You’ll want to grow your business, not just gain a ton of new customers. It’s actually 6-7x more expensive to gain a new customer, than it is to keep a current one. (Source: White House Office of Consumer Affairs).
• Cleaning House – Having the right customers is what matters most to a business. If you raise your prices, your low-quality customers will leave and go elsewhere – leaving those high-quality customers who see the value in what you charge.
• Quality over Quantity – Your business’s increase in costs are not the same as increasing in price. Most of the revenue you get from increasing your prices goes toward increasing profits.
• Competition – When figuring out where your new pricing should be, look at your competition. You may not want to be the lowest, or the highest, but show your customers the quality and service they can get.
• Statement – Most consumers have heard the saying, “you get what you pay for.” If your services are too low, many buyers will assume there’s something wrong with it. Also, other competitors may follow suit and lower their prices, and then you’re just in a race to the bottom.
• Focus – By raising your pricing, you need to look at the service as a whole. Will you also need to improve your quality of service? What other high-value items can you provide to your customers? By focusing on your value will help show your customers that you’re willing to focus on the overall experience in the long-run.

Each year, be sure to look at your pricing and your business’ financial health. Not increasing pricing when needed, can result in loss of cash flow when your business is ready to grow.

Have questions about pricing? Reach out to me at judi.otton@growth-cast.com.

According to a small business administration study, over 28% of businesses go bankrupt due to problems with the financial structure of the company, and in many cases this could have been avoided.[1]

Understanding your accounting reports is essential in order to stay on top of business so you can manage your finances and make informed decisions based on facts.

These tips will help keep your books current and your habits on point.

The necessity of good accounting practices for small businesses

• Not having adequate accounting procedures in place is akin to financial suicide and could easily cost over $100,000. The average time lost by having to fix and implement a system is 200 hours or more.

Poor Record Keeping Has Consequences

• Overlooked/unpaid expenses.
• Penalties incurred for filing taxes late.
• Mingling of assets (savings vs. checking, personal vs. business, etc.)
• Difficulty paying bills and employees.

Your Cash Flow

The Cash Flow Cycle – Cash Flow is a complex, vital process and requires knowledge of a company’s financial accounting systems general management of financial information, and proper inventory control.

A Basic Formula Covers –

• Accounts Payable – liabilities, money you owe
• Net Income (the bottom line) – revenues, expenses, net income
• Accounts Receivable – assets, money you receive

What Documentation Is Needed?

Every Business has financials that evaluate the health of their business. It’s important to take a look at your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement.

Reading The Statements

Profit and Loss Statement – Show net profit. Major components:

• Revenue
• Cost of goods sold
• Gross profit
• Expenses
• Net profit

There are two basic equations:

• Revenue – Cost of Goods Sold = Gross Profits
• Gross Profit – Expenses = Net Profit

Balance Sheet – It’s an overall picture of where your company stands. It includes:

• Assets – cash, stocks, accounts receivable, inventory, equipment, vehicles.
• Liabilities – credit card balances, taxes, accounts payable, accrued payroll, loan repayments.
• Equity – retained earnings, common stock

Cash Flow Statement – Analyzes cash generated and used for a specific period. It includes:

• Operating activities
• Investing activities
• Financing activities
• Supplemental information

Sales Forecast

Helps eliminate future earnings (typically 1-3 years) and informs your sales strategy.

Projected Annual Sales:

Total Revenue To-Date + Run Date x Remaining Number of Sales Periods

Projected Monthly Sales:

Actual Monthly Sales From The Same Time Last Year / Last Years Remaining Sales x Run Date x Remaining Number of Sales Periods

Historical Sales:

Company Revenue To-Date / Number Of Sales Periods x Info On If Product Services Have Changed

Business Ratios

Financial tools used by financial analysts, investors, and bankers to determine your financial health include different types of standard business ratios:

Main Ratios:

• Total Debt to Total Assets – Shows your percentage of assets financed with debt.
• Pre-Tax Return on Net Worth – Shows the shareholder earnings before taxes.
• Pre-Tax Return on Assets – Shows how the company manages and allocates resources.

Other Ratios:

• Net profit margin
• Return on equity
• Accounts receivable turnover
• Assets to sales
• Current debt/Total assets

Finding Someone to Help (Like Me!)

If you’re spending too much time on your business’ financials or you don’t fully understand what you’re looking at, it may be time to hire a professional. It’s still vital to have basic accounting knowledge, but you’ll save yourself time and money by hiring someone who knows what they’re doing – again, like me.

Good accounting is crucial to the growth and longevity of your business. Over time, it will help you create and manage budgets, forecast future revenue, track expenses and look at the overall health of your business. Email me to help go over any of these statements or equations – I’m here to help!

[1] Making a Market Forecast Estimate, Bplans

Think about it – when drawing out a plan of action for your business, you can minimize any unexpected cash flow issues, control spending, inform decisions in other departments, assist with financing applications and reduce overall risk. Here are 12 steps you can take right now to create a business budget.

1. Research Costs – Why? No one wants to pay more than they really have to.

• Oversite costs to avoid underestimating expenditures.
• Marketing costs are notoriously easy to underestimate.
• For new businesses, include start-up costs.
• Variable costs generally correlate with sales.

Fixed costs to include:

• Rent
• Utilities
• Phone/Internet
• Accountancy
• Legal Fees
• Technology
• Advertising & Marketing
• Salaries

Variable costs to include:

• Costs of goods sold
• Labor costs

2. Project Revenues –
   • Forecast revenue
   • Use conservative revenue estimates
   • Use previous years’ figures as a starting point

3. Figure Out Gross Profit Margins –
   • List all costs of goods sold
   • Subtract costs from overall sales revenue
   • Consider entire business vs individual departments

4. Create a 12-Month Cashflow Projection
   • Allow for payment terms – e.g. 30 days
   • Allow for payment method – credit agreements incur expenses
   • Understand your opening balance & how this affects cashflow

5. Adjust For Unreliable Payers
   • Allow for late payments in revenue column
   • Allow for bad debt
   • Create business policies to deal with late payment

6. Adjust For Seasonality
   • Research seasonal demand for your industry thoroughly
   • Create savings at peak periods to cover quiet months
   • Allow for temporary staff is required to meet demand
   • Allow for increased production costs at peak time

7. Adjust For Economic & Industry Trends
   • Consider general industry growth
   • Consider wider economic growth
   • Consult forecasts from reliable industry experts

8. Decide How To Spend
   • Fixed rate energy plans help forecasting
   • Decide whether to buy or lease technology, vehicles, etc.
   • Decide whether to buy new or used products
   • Decide whether to buy on finance or outright

9. Discuss Expenditure With Department Heads
   • Project one-off expenses
   • Agree necessary spending
   • Create targets to incentivize performance

10. Prioritize Investment
    • Decide where to assign profits over forecasted levels
    • Consult key management and department heads
    • Discount non-essential expenses
    • Prioritize projects over individual costs

11. Create A Contingency Plan
    • Conduct a risk analysis
    • Plan for financial underperformance and overperformance (which can bring it’s own set of challenges)
    • Consider impact of each option on business performance
    • Minimize loss in business-critical areas

12. Plan Regular Budget Reviews
    • Quarterly budget reviews allow flexibility
    • Be reactive to over/underperformance
    • Adjust figures accordingly
    • Speak to your accountant or business consultant before making big decisions

Along the way of creating this budget, feel free to reach out to me with any questions. Each business is individual and unique, as should their plan. Contact us here for more information: CONTACT US HERE

When you’re suffering with cash flow problems and consider alternative finance for your business, there are a few options available. It mostly depends on what the money is needed for, the size, type and life stage of your company,  your (and your company’s) credit rating, and how much you need. Do you know which form of alternative business finance is right for you?

Business Loan –

A quick business loan could help when you need:

–       A flexible and quick solution that can be repaid in convenient, fixed installments.

–       A cash injection to:

o   Buy new equipment

o   Buy new machinery

o   Buy company vehicles

o   Fund a marketing campaign

o   Fund seasonal fluctuations in trade

Certain quick-loan companies can provide different amounts for different needs, offering fixed rates and flexible loan terms.   Be careful here – some online lenders are not so scrupulous.  You’ll do better with a local banker you can trust.

Peer to peer lending –

Peer to peer lending could help when you:

–       Need to fund a specific project

–       Have more time on your side – you can’t get money in your bank within 24 hours

–       Are not worries about flexibility – more people are involved and terms are rigid in terms of extending

–       Have been in business for at least 2 years

If you are suffering cash flow problems, peer to peer lending may incur higher interest rates.

Asset-based lending –

Asset-based lending could help when you:

–       Can fund expansion based on your current assets

–       Need to grow your current business

–       Need to purchase new/additional property

–       Need finance for exporting or importing

Some companies will provide funding in situations where you are struggling to gain business finances from your bank. They can take a different view on longer-term asset-based finance and look past short-term cash flow problems to consider overall business viability when lending.

Invoice financing or Factoring –

Invoice finance could help when you need:

–       Quicker access to cash then your payment terms allow for

–       To borrow more than a traditional overdraft would offer as a safety net to cover fluctuations in payment

Some companies allow you to borrow up to 85% of your invoice value immediately, releasing cash that you are awaiting to aid your every-day working capital.

Have questions? Feel free to email me at judi.otton@growth-cast.com