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Steve Windhaus Ask the Small Biz Adviser

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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See Also
Don't underestimate the cost of starting a company
How to make your home-office relocation a reality
Basics of conducting your own marketing survey

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