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Setting the proper price
Dear Small Biz Adviser:
I have been making clothing and selling
it. Now I only charge for material and time, but I plan on starting
a small business outside the home. Could you give me some advice
in how to figure out what I need to charge now that there will be
overhead, taxes and so on?
Thank you,
Donna
Dear Donna:
While you may only charge for material and time, I find it
extremely difficult to believe those were the only costs you incurred
in making your product.
I suspect you've had additional costs, such as household
expenses, real estate taxes and utilities, that could count against
your business income on your tax return. Such expenses will become
even more obvious when you move out of your house and into a storefront.
Now that you've decided to relocate your business,
here are some basic definitions and procedures with which you should
become familiar:
1. Choose the appropriate pricing strategy.
Decide whether you want to be a discount merchant, a prestige
shop or in the middle of the pack, and set your prices accordingly.
2. Define the cost of goods sold. The formula is: Cost
of Goods Sold = Beginning Inventory + Purchases - End Inventory
3. Determine your selling price's break-even level. Simply
stated, you must figure how much sales volume at a selected price
must be accomplished to cover all costs (fixed and variable) and
generate a profit. In other words, it is the point in sales volume
at which you have no profit and no loss. This is most commonly
applied to a business that sells product. The formula is: Breakeven
= Fixed Costs / (Revenue - Variable Costs)
4. Develop projected financial statements to determine the
feasibility of your numbers. These statements include cash
flow, income and balance sheets.
Count your costs
Before developing the financial statements, you will need
a list of costs to operate the storefront. These include utilities,
taxes, monthly lease and any other operating expenses that will
occur on a regular, monthly basis.
You also will need to develop a list of one-time costs
that will occur when you open the storefront. They include any leasehold
improvements and deposits for the lease and utilities.
A third set of costs that may not occur on a monthly
basis will now arise. They may include legal, accounting and insurance
fees.
But before you can even determine the financial projections,
you need to do some market research to determine what will be the
projected sales in the new storefront. It is very likely you may
have to generate more sales to cover the added expenses.
I suggest you begin your expansion activity by first
visiting with a local Small
Business Development Center, SCORE
chapter or nearby Women's
Business Center. These offer free, confidential counseling and
low-cost to no-cost workshops. They also will help you discover
many business issues that could become serious burdens if not addressed
beforehand.
I wish you well.
-- Posted: Jan. 3, 2002
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