The Women”™s Business Development Council (WBDC) recently hosted the webinar “Financial Foundations: Pricing, Profitability, Projections” to provide small business owners ”” particularly those who are new to entrepreneurship ”” with guidance and advice on how to set pricing and properly balance and consider associated costs with running a business.
WBDC Business Adviser Sherry Konwerski”™s presentation focused first on goals and costs small businesses must take into consideration. This included setting a desired profit and keeping in mind overhead expenses such as rent, utilities, insurance, and office supplies. She also stressed the importance in setting how many hours new business owners would like to work in their business and figuring out what tasks they perform that are or should be billable.
“Let”™s say the average person wants 40 hours a week they want to put in their business,” Konwerski said. “How much of that time are you making money? For most of us, at least 25% is not paid time. That”™s when we”™re doing our marketing, that”™s when we”™re doing our accounting, that”™s when we”™re returning emails. It”™s the things that we just don”™t get paid for as business owners, so you need to know what percentage of the time is billable or money-making, versus working in your business.”
In addition to overhead cost, Konwerksi stated new business owners must determine total product cost, which one may arrive at by adding cost of materials, cost of labor and cost of packing and shipping. Desired profit is 20% of the combined total of overhead costs and total product costs, while adding overhead costs, total product costs and desired profit gives a business owner a product selling price.
Konwerski illustrated how this is to be done by using a company that sells women”™s clothing, with a particular focus on dickie collars. In this scenario, the total product cost for 100 units of dickie collars is $12.25. The company”™s overhead costs are determined to be $1 of that total product cost, as it pays $400 in rent a month and 100 collars are expected to be sold in a month. Desired profit is $2.65, which is 20% of $13.25 ”” the combined total of overhead costs and total product costs. Adding $13.25 and $2.65 puts the product selling price at $15.90.
For service pricing, owners should see what the competition offers its customers and the prices they are charging. However, Konwerski argued that “knowing what your competitors are charging is important, but it”™s not the only guide as to what your pricing can be.” Though two competitors may offer the same or similar services, much of consumer appeal can come down to what makes one unique and special, and thus more valuable.
Konwerski used an example of two fitness trainers, one who does the bare minimum and simply shows their customer what machines do at a gym whereas another trainer provides nutritional advice and arrives at customers”™ homes with special exercise equipment. Though the latter fitness trainer”™s services are significantly more expensive, their services are valued enough that they still attract customers willing to pay the premium. Provided a business owner can justify higher prices, charging more than the competition is a viable strategy, she added.
Besides running a business with profit in mind, the seminar emphasized the importance of a business”™ books. Konwerski recommend the use of QuickBooks or similar programs in order to keep track of income and expenses that also include employee payroll. Keeping one”™s financial records organized is also important for tax purposes.
“We all have to pay a lot in taxes, and we all pay our fair share,” Konwerski said. “I don”™t want you to have to pay any more than you need to pay and if you keep good records ”” and we know this is how much was income, this is how much was expenses, this paid off a loan, this was buying a car, whatever those things are ”” and they are represented in your books properly, you will not pay more taxes than you have to.”
By having good and up-to-date records and operating business in a consistent and efficient manner, Konwerski continued, one is better able to create a profit and loss income statement for the year and better project next year”™s profit and losses. Should there be plans to change how business is conducted, such as offering new products, then projections should be changed accordingly per the business owner”™s best guess.
“Let”™s say that you are a bike company on Cape Cod that rents bikes during the summer,” she said. “What if you started doing snowmobile rentals in the winter? How would that change your projection? Would you still see that lull in the winter? You”™ve opened up a new product line that is now allowing you to have much more consistent income throughout the year instead of it all being in the summer or all being in the winter.”
“Those are the types of things you will show in your projections if you are trying to get a loan from a bank,” she added. “Show them that by getting the money that you are requesting and how you plan on using it, how the numbers of your business will change.”
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