03/ 21/ 2005
by Jim R. Sapp
A new business owner has to keep an eye on employees, operations and inventory, but sales are the true key to financial success. Sales are what will keep you in business next month. Nothing is more important. Sales are the very lifeblood of your business. Your company will grow quickly as long as you are selling your product or service and being paid for it. If you don't pay close attention to sales, your company will fail.
During your first year of business, you will need to track your sales (or revenues) every day. This number should be the first thing you review every morning and the last thing you look at before you close. How many widgets did you sell today? How many service hours did you invoice? How much money will those sales bring in? When is that money due?
Do not think for a moment that sales will come easily or that customers will come knocking at your door. You must plan your sales strategy. Remember, nothing happens until a sale is completed and paid in full.
How much should you charge customers for your product or service? This, of course, depends on the nature of your business. There are no specific formulas. You must do some research to find an appropriate price for your specific product.
Research Your IndustryA place to begin is to research your specific industry. Make a list of similar products or services and how much other companies charge for them. This information will tell you what the market is accustomed to paying.
Review Your Costs
Once you know what the market will bear, review your costs for producing the product or service – the cost of goods or raw materials, the amount of staff time (including your time) it will take to produce the product, as well as the amount of administrative time to invoice your customers and collect payments. You also need to include general operating expenses and administrative costs (or G&A) -- when calculating the cost of your product or service. G&A expenses include rent, leases, marketing, sales expenses, administrative costs, insurance and inventory costs, which vary by industry.
Mark up for Profit
When you know what your costs will be to produce the product or service, you then increase the price by a certain percentage for profit. Do not be ashamed to mark up your product or service. Your small business must make a profit to grow next year, pay off debt and continue to be a viable enterprise.
The amount of the markup varies by industry, service, potential liability and general overhead. Generally, you should at least double your fixed costs to get a selling price. In retail, this is known as "keystone" pricing. When retailers apply a discount of 10-40 percent for a sale on their products, they still make a profit because they used keystone pricing.
Be careful not to overprice or underprice. Increase your prices with inflation and as the company grows. If appropriate, vary your price depending on customer demand, the season or the timing of your service.
Jim R. Sapp is an international business consultant and speaker with more than 25 years experience as a business owner and entrepreneur. He is founder and director of the American Small Business Institute, and recipient of both the "Entrepreneur of the Year" award and "Blue Chip Enterprise Award" for inspirational achievement in business. His book, Starting Your First Business, is available from www.sappbiz.com or by calling (800) 570-5436.
