Estimates -- Provide the customer with a written estimate to help avoid possible misunderstandings later. The estimate should reflect the maximum charges. Final charges to the customer may be less but should not be more unless there are circumstances explained to and accepted by the customer.
Inflation -- Prices must adjust as the cost of doing business rises. It is best to anticipate rising costs when setting prices so that frequent price changes are not necessary.
Competition -- Determine what the competition is charging for its product or service. The prices charged may be lower, higher, or about the same. If customers question a price by drawing comparisons to the competition, point out the quality of the work, the uniqueness of the product or service, and other features or selling points. Do not let customers change prices that are based on sound pricing strategy.
Discounts/Markdowns -- Discount prices only when necessary to generate business to increase cash flow. Limit discounts for family and friends.
Expertise -- In general, the higher the skill level or level of expertise, the more willing customers are to pay higher prices. Those with better skills can often produce more or provide more services in less time without sacrificing quality, and time is money.
Itemizing -- Sometimes, itemizing the final bill may help customers understand the amount charged. Frequently customers do not realize the amount of time involved and costs of materials.
Location -- Regional differences can affect prices. Generally, prices in urban, suburban, and high-income areas can be higher than prices in rural and low-income areas.
Exclusivity -- Custom, original, or one-of-a-kind products or services can command higher prices. Customers are willing to pay more for items or services that are limited in availability and less for items and services that are readily available.
Quality -- In most cases, the higher the quality, the more customers are willing to pay for a product or service. Top-of-the-line products and services can command top-of-the-line prices.
Professionalism -- Businesses that look and act professional are usually worth to the customer.
Seasonality -- Some products or services sell better at certain times of the year (for example, holiday items).
Volume -- Increased sales volume may or may not warrant lower prices. Sometimes it is more economically efficient to produce multiples of the same products. Any added savings gained through efficiency must be weighed against the expense of selling more items (for example, extra employees may be needed as volume increases).
The Market Will Bear -- What the market will bear for price can be critical. In some cases, the cost of producing the product or service is too high. No matter how great it is, the market is not willing to pay the price a business needs to charge to make a profit. On the other hand, there are times when the market will pay a much higher price than the actual cost of producing the product or service. Understanding the market and what customers will or will not pay directly impacts pricing.
The primary purpose in operating a business is to make a profit. Prices should be established from an accurate accounting of direct costs, labor, overhead expenses, and profit margin. In addition, careful thought of all factors that may have an impact on the business should be considered as a pricing strategy is established. Pricing is a skill that must be developed and continuously monitored for a business to be successful and profitable.
RECORD KEEPING AND TAXES
Accurate financial records are essential to the smooth operation of any business. It is important for the record-keeping system to be user-friendly so that the "health" of the business can be checked at any time. The key to an effective and efficient record-keeping system is to set it up correctly initially. If you are unsure how to do this, it may be worth seeking advice from an accountant. Seek an accountant who is familiar with and appreciates home-based businesses.
Begin with a separate bank account for the business. Do not combine personal and business receipts and expenses. The combination causes confusion and the inability to account properly for the business operations.
Pay all business expenses by check and keep all receipts of business expenditures, noting on the recepit the check number and the date paid. If you wish to use business funds for personal expenses, make a "withdrawal"(write a check payable to you) and deposit it in your personal account, then pay the personal expense from your personal account. Do not pay personal expenses directly from the business account. Deposit all business receipts intact.
In your record-keeping system, maintain a cash receipts journal and a cash disbursements journal. Inexpensive journals and business forms are sold in a variety of places. There are also several good accounting and recordkeeping software packages available at reasonable prices if you choose to maintain records on your computer.
Cash Receipts Journal
The cash receipts journal has columns for various categories of receipts, with separate lines each entry, to record the date, the source of cash, and the total amount. All columns of the cash receipts journal should be totaled each month, followed with year-to-date totals.
Cash Disbursements Journal
A cash disbursements journal has columns for various categories of expenditures with a line for each expenditure and spcae to record the date, the check number, the payee, a description of the expense or purchase, and the total amount. The column categories may be merchandise for resale, supplies, interest, utilities, taxes, wage or salary expenses, owner's withdrawals, and other common purchases or expenditures. All columns of the cash disbursements journal should be totaled each month, with a year-to-date total for each month.
