Avoid Small Business Bankruptcy by Doing THIS Simple Thing
Jun 10, 2024![](https://kajabi-storefronts-production.kajabi-cdn.com/kajabi-storefronts-production/file-uploads/blogs/2147632567/images/471adc-fde7-6a2b-f43f-ce17a7fc627_Blog_Templates_12_.png)
One of the biggest causes of small business failures is a lack of cash flow. And why is that? Because small businesses often struggle with pricing their products and services to ensure they are actually making a profit. Today, we’re going to delve into a very tactical, yet simple way for you to price your products and services effectively, so you don’t end up in bankruptcy court.
Hey, I'm Jason Pond, the Mountain Freedom Coach. After building nine businesses over the last 31 years, I've learned a thing or two about identifying problems that can lead to bankruptcy before they spiral out of control. I now work with businesses ranging from six figures to multiple nine figures, helping them remove roadblocks that are hindering their growth.
Understanding the Importance of Cash Flow
Cash flow is the lifeline of any business. Without a steady influx of cash, even the most promising companies can find themselves in dire straits. Effective pricing is crucial for maintaining healthy cash flow. If your prices are too low, you won’t cover your costs; if they’re too high, you may scare away potential customers. Finding the sweet spot is key to avoiding financial pitfalls.
The Power of Proper Pricing
Proper pricing ensures that every sale contributes positively to your bottom line. Knowing how to set your prices accurately can mean the difference between thriving and merely surviving—or worse, failing.
Today’s advice is simple, spreadsheet-based, and proven to work. Note: I am not an accountant or an attorney. For accounting advice, please consult an accountant, and for tax advice, consult a tax attorney or tax accountant.
Building Your Pricing Spreadsheet
Step 1: Break Down Your Revenue
Start by gathering the annual revenue for your business. Break this down into monthly figures. Why monthly? Because it allows you to set and track monthly targets, which is critical for maintaining a clear picture of your financial health.
Step 2: Categorize Your Expenses
Next, categorize your expenses. Here are some common categories:
- Sales, General, and Administrative (SG&A): These are your basic operating expenses such as utilities (cell phone, power, natural gas), rent or lease, and non-revenue-generating payroll (e.g., administrative staff, bookkeepers).
- Sales Expenses: This includes payroll for sales staff, advertising, marketing, and any variable costs directly tied to generating sales.
- Insurance: Both payroll-related insurance (health insurance, worker’s comp) and business insurance (liability insurance).
Step 3: Calculate Monthly Costs
Review each category and assign a monthly cost. While some expenses like utilities and rent will be fairly static, others, such as advertising spend, can vary. Adjust these figures based on your business cycle, noting that some months may have higher revenue and others lower.
Step 4: Determine Cost of Goods Sold (COGS)
For businesses that sell products, COGS is a critical figure. It represents what it takes to provide the service or product, including wholesale costs and labor. For service-based businesses, this might include software subscriptions or maintenance services. Calculate your COGS by determining the cost to you (X) and then adding a percentage to derive your selling price (Y).
Step 5: Include Markup
Whether you’re selling products or services, you need to include a markup to cover costs and generate profit. This markup should take into account both fixed and variable costs, ensuring that each sale contributes to your overall profitability.
Example: Monthly Recurring Revenue Business
Consider a business that provides web hosting and email services. Here's how you might set up your spreadsheet:
- Monthly Revenue: Break down annual revenue into monthly increments.
- Expenses: List your fixed and variable expenses, such as utilities, rent, payroll, and advertising.
- COGS: Calculate the costs associated with providing your service. For a web hosting service, this might include the wholesale cost of hosting and email services from providers like GoDaddy.
- Markup: Determine the appropriate markup to ensure profitability.
For instance, if your wholesale cost for web hosting is $500 per month, and you add a 20% markup, your selling price would be $600 per month. Ensure this covers all associated costs and contributes to your bottom line.
Conclusion
By breaking down your revenue and expenses into a detailed spreadsheet, you gain a comprehensive understanding of your financial landscape. This approach not only helps you set accurate prices but also allows you to track financial performance monthly, making it easier to spot potential cash flow issues before they become critical.
Remember, proper pricing is fundamental to maintaining healthy cash flow and avoiding bankruptcy. By taking the time to build and maintain a detailed pricing spreadsheet, you can ensure your business remains profitable and sustainable.
If you need further assistance or want to dive deeper into optimizing your business finances, feel free to reach out. Together, we can tackle financial challenges and set your business on the path to success.
By following these steps, you'll be well on your way to avoiding the financial pitfalls that lead many small businesses into bankruptcy. Stay proactive, stay informed, and most importantly, keep tracking your numbers. If you found this guide helpful, consider sharing it with fellow entrepreneurs and joining my Mastermind: Business Building Blueprint. Let's work together to build financially resilient businesses.
If you're interested in Business Coaching, let's schedule a discovery call to kickstart the conversation.
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