Small Business Development Center
At Chemeketa Center for Business & Industry
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Monthly Archives: February 2015

The Trouble with the Low-Cost Game

By Chemeketa SBDC

Don’t have enough customers so it’s time to lower prices, right? Well, maybe. You may be tempted to do this in your business, especially if a competitor has lowered prices. But you run the risk of lowering yourself right out of business.

Carefully consider other options; perhaps there are better ways to remain competitive. And if you need to lower prices, do so with a clear idea of where that might take your business.

• Review each step of your supply chain, from your vendors on through to your customers. Why are there not enough customers? Are you losing current customers because they’re dissatisfied? Chances are there’s more to it than your prices. Find the areas of weakness and shore them up.

• Find ways to cut costs where your competition can’t. This increases your margins and consequently your cash. If you need to cut prices as a last resort, you’ll be sitting in a better position. You may think you’ve cut costs to the bone, but take another look.

• Examine your business model. Are there strategic changes you can make instead of tinkering with pricing? Are your current offerings what the market really wants? You may have a problem with what you’re selling instead of how much you’re charging for it.

• See if you can raise prices in a complementary service or good if you need to lower them on a core good or service. A coffee shop might leave the coffee pricing alone, but slightly increase prices for pastries. This results in the same revenue per customer. On the surface it appears as if you are competitively priced, but you’re not paying the penalty for those low prices.

• Selectively lower prices for only some of your customer base, or for only a limited time as an incentive. Make sure that what you gain (in customer loyalty or in increased purchases of ancillary goods) makes up for the loss from the price reductions. Be strategic about this.

• Have a clear idea of just how low you can go, if you choose to engage in a price war. Know your limits. Remember that smaller businesses will lose this arms race much faster than larger and better capitalized businesses.

 


How Much Money to Launch a New Venture?

By Chemeketa SBDC

Trying to determine how much money you will need to launch a new business can be a daunting task. While I find that new entrepreneurs are comfortable writing the business plan narrative (who, what, where, when and why) when given the right tools, developing a budget often seems to be a venture into a dark abyss. This is also the case when expanding a business or introducing a new product to the market. It isn’t that you don’t know or cannot find out the costs — it is about how to organize the financial needs.

The first part of your start-up budget is relatively straightforward. The first items in your budget should be those costs that you will pay only once. These are the costs to get you into business. If at all possible, these expenses should come from your equity investment and not from borrowed funds. A combination of investment and loans is possible, but borrowing all the money to pay for start-up costs may create early cash flow problems as you need to pay your debt service before income has a chance to grow past the break-even point into profitability.

The costs involved in start-up may include: legal and accounting charges for incorporation or partnership agreements, fees to government entities for licenses or permits, rental and security deposits, site preparation including leasehold improvements, furniture and fixtures, utility deposits and telephone installation, and printed materials including business cards, letterhead and marketing materials. And, of course, the necessary machinery and equipment and your initial inventory. The only way to determine these costs are to do your homework. You must call, write, or visit each of the vendors, explain what you are developing and get a quote or approximate price for a specific task.

Next, make a list of all the equipment (assets) you need to get this project off the ground. You must again research the cost and get quotes on specific items. Pro forma invoices are always good to get for the project file so you can have current information on hand, have something to compare other offers and/or even have for future reference should you choose not to proceed at this time.

You will also need to know how much inventory you need on hand to develop the business and to keep the shelves stocked appropriately until such time that sales can cover the cost of restocking. Price out each item individually and by bulk purchase to know your options and increase your flexibility.

The most difficult component of your start-up budget will be to determine how much cash you will need for working capital. This is the money you need to fund early losses and to smooth out your cash flow. You need to run a cash flow projection (beginning cash plus income, less cost of goods, less expenses) on a monthly basis for minimally one year to determine how much money is “in the bank.” You will most likely see potential “overdraws.” This is where your working capital requirements are established. There are only two ways to fund these overdraws — with capital infusion or by acquiring debt (not paying your vendors). So, plan on having (possibly borrowing) sufficient capital in reserve to fund early losses and to pay necessary expenses as your cash flow begins to build.