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The New Entrepreneur: Financial Management

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Following on from the last post in the series, this post is going to address a couple more factors that should be considered when thinking about your business handles its money. Once again, not every course of action is suited to every business, so it is vital that you take the time to think about what your business actually needs before deciding on a particular course of action.

In terms of keeping an eye of the money you are spending, you can’t go wrong with a bit of cost analysis. This involves getting the best possible price for your required materials, and while it may seem obvious, it does bear some deep thought. The goods you need for your business, and their availability will differ from different suppliers in terms of quality, ease of transport and delivery options in addition to the price you pay. In the long term, it pays to keep yourself informed as to what is available and on what terms. What you then need to do is to create a costing system whereby every item and process in your business is either a cost object or a cost centre, where you can allocate direct and indirect costs.

Indirect costs are incredibly annoying, in that they are wholly subjective and there is no concrete way of nailing them down. Most of the businesses I have dealt with in the past have tended to apportion their indirect costs as percentages, either as total indirect costs or total costs, but there are always problems with such a system, as some incurred costs are more important to a business than another. Nevertheless, once again, this is an area where you need to decide what is best for your business.

Pricing
Another area which will probably cause you angst is pricing. The issue may seem simple, but it is one of the things you need to decide on in advance, as it is harder to change your pricing structure once your business is actually up and running. If you are not going to fall into bankruptcy almost as soon as you start, your pricing needs to be pinpointed to not only cover the costs of running your business but also to give you some income. For this to happen, you need to estimate the level of sales you are going to make, and to break down your costs and profit to arrive at a price where your business will survive. Remember, it is not the job of your customers to give you money: their spending money with you is practically an act of charity. You therefore need to be sure that the price at which you sell your service or goods is one at which your business is sustainable.

The easiest way of approaching your pricing policy is to make a decision early on if you are trading on quality or quantity. If it is the latter, you can take the “pile ’em high and sell ’em cheap” approach, relying on the sheer number of sales to drive your business to profitability. If you go with the quality strategy, however, you need to be sure that the price point you pick is enough to cover your costs in an envrionment where you will not be making as many sales as you would otherwise expect. This is one of the times when it pays to aim high: it is easier to lower your prices after consumers think that they are too high than it is to start off as affordable before alienating your customer base after you realise that you are not making any money.

I’ll confess right now that I find the financial considerations and calculations necessary for a decent business plan incredibly tedious. Even with a business degree, the number don’t seem as exciting as trying to mould an idea into a viable business concept, or harnessing market research data to form a coherent promotion strategy. But ignoring the figures is one reason why so many good business ideas fail; without them, your business idea is nothing. Get the numbers right and your business stands a better chance of succeeding. Get them wrong, and expect a long period of disappointment and financial ignominy.

[Image b KM & G-Morris]

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2 Comments

  1. kenyantykoon says:

    This is a really nice post. I wish i had some of this info before one of my businesses failed because of this pricing issue. Am adding u to mu blogroll. Add me on yours
    http://kenyantykoon.wordpress.com/

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