It’s tempting to bury your head in the sand when it comes to the money side of the business, especially in the early days when there is so many other things to do. BUT DON’T, the start up stage is the best time to get to grips with the finances, put good processes and practises in place early on and you will reap the rewards as your business grows.
Getting your prices right is a science not an art. It’s tempting just to charge a similar price to the competition, but to ensure profitability start with a number – your break-even point. This is the amount you need to charge to cover all the business costs, include the things that vary with the number of products sold like materials, products, electricity, packaging, marketing etc. But don’t forget to take account of the other things like business rates, wages, rent etc. and your own time!
Once you know this you can factor in:
Traditional pricing adds a percentage mark-up to the breakeven point, but you can also base your price on the value your customers attach to the product; a higher price based on the brand, uniqueness or exclusivity.
Stay flexible, aware of the competition and the market and review your prices regularly but beware of discounting it might seem small but it makes a big dent in your profit. Most of all, don’t under value yourself or your goods, be confident that your product is worth it!
* Expert tip: Fiddle with your finance spreadsheets; use auto calculate to experiment with what your profits looks like if you increase the price or your sales by 10% and see what happens to your bottom line if you reduce costs. Do this for a whole year and see how much more profitable you will be – it’s very motivational!
The most successful companies keep comprehensive records of all sales, business purchases and expenses – from day one. When you are at the planning stage, map out a personal survival plan detailing your current personal expenditure (household and personal bills). Then create a cash flow forecast month by month detailing: your product and other business costs (money out) and how much you think you will sell (money in). This will help you plan how much you need to sell in order to cover your personal financial needs and all your business expenditure and also to see what sort of profit you can expect to make.
As you start to trade, the actual will overtake the forecast and the cash flow will become your bible; a tool to predict your business profitability and to set sales targets. Breakdown your sales by product and record sales activity for each; the more detailed your records are, the better you will be able to identify which products sell and where, then plan your sales activity around that information.
* Expert tip: If this all truly floors you, find an accountant who you trust and like but especially one who takes the time to understand your business and is invested in your success. They will become part of your team as your company grows.