Using Accounting Details to Develop Pricing Strategy

An early decision in the development of a business is determining how to price what’s being sold. The right price assures profit. A price that’s too high could cause consumer demand to evaporate. A price that’s too low will leave you bankrupt from expenses exceeding revenue.

Price Accounting

Settling on an optimal price is the by-product of an accounting process rather than a guessing game. The exercise begins with a general operating budget. Assess your productive resources. This includes time because you can only work a limited number of hours per month. Determine how much can be produced with the given amount of time, personnel and equipment at your disposal.

Next, identify the average monthly costs for these resources. Some expenses are fixed, such as rent, Internet service and telephone charges. Other costs are variable, such as outside contractors and owner compensation. For these, assume maximum cash outflow when the business is operating at full capacity.

The sum of all ongoing expenses shows how much income is needed to break even. The last step is identifying a break-even price for your production output. If your business provides a service, for example, the price for a month-long project must cover one month of costs. A business that makes a product determines break-even price by dividing the number of units that can be made in a month into the monthly costs.

Price Strategy

Knowing a break-even price is only a starting point. A small business typically tests various pricing strategies. This may entail charging a break-even price based on less than maximum output to gain a profit later when volume rises. A common pricing strategy is simply calculating all expenses and adding some profit. Then determine a price by dividing that figure by production output, whether that’s a typical project, a product or an hourly rate.

Of course, if you sell a common commodity or branded goods, your price is largely determined by the competition. This demand for competitive pricing means going back to your costs for assurance that profitability is viable based on market price. On the other hand, if your business can distinguish itself from competitors, careful price planning yields profit opportunities. This situation permits your enterprise to charge higher prices for greater quality even if it has a lower quantity of output.

Selling multiple types of services or products can complicate pricing strategy. If you want to explore item-specific pricing, you’re tasked with determining the costs for each thing your business sells. This means knowing the direct costs of providing each sale item plus allocating fixed costs among the various sales categories.

In most of the cases, however, a small business simply identifies an average price per product or service. Some things may sell for a higher price than their costs while others sell for slightly less than their costs. Nevertheless, identifying an average price for somewhat similar items or projects greatly simplifies pricing strategy analysis. The goal, of course, is for the average price of each thing sold multiplied by the number of sales in a period to cover costs for the period and provide some profit.

Details to Examine in Partnership Financial Statements

The best partners in a business, like ingredients in a good meal, complement each other. They are not identical, but they are not entirely opposite, either. Your business partner should bring elements to the partnership that offset your weaknesses. Going into business with someone is a big commitment. Taking it seriously means carefully reflecting on what each person contributes to the partnership.

Great partnerships are forged, for example, when one person is effective at sales while another individual focuses on production and managing the finances. In addition, certain similarities are necessary to enjoy advantages from having a business partner. Most crucial among these is that successful partners communicate clearly about goals and working toward the common achievement of them.

The indispensable tool for evaluating a joint effort by partners on a growth trajectory is an accurate accounting of business results. Financial statements must be understood together by the partners. Among the areas to examine are the capital contributions and draws of each partner. In general, these should be proportional to ownership percentages. Partners will also compare the business income to hours worked by each of them. These should be in accordance with the design when the partnership was formed.

Both partners should have assurance from the business’s financial statements that profitability is unfolding as planned. Even more important is identifying areas for improvement when profits are disappointing. This triggers a renewed focus on either sales or cost controls. Action is usually necessary on both fronts, which means a coordinated effort by the partners.

Specific Fixes to Small Business Cash Flow Issues

Every business owner is aware that cash is absolutely tethered to sustainability and the avoidance of irreversible trouble. Although financial struggles can arise without warning, sound management of cash assures survival without catastrophe.

A key focus for every entrepreneur, therefore, is cash supervision. Mismanaged finances are a consequence of neglect. Addressing a few primary matters is certain to place you on the right path for orderly business operation, especially after unexpected adversity.

Tracking Business Revenue and Expenses

Cash management begins with having a clear understanding of funds coming in and money going out. Moreover, knowledge of upcoming cash flow issues is crucial. This all begins, of course, with keeping proper financial records. When you haven’t had time to update the recording of business transactions, relying on expert bookkeeping assistance will get you up-to-date.

Your duty is thus limited to conveying the purpose of every expenditure and the sources of all cash receipts. Accounting, bookkeeping, and tax compliance are still your responsibility. But financial professionals can carry the load of assembling the details you need to meet these obligations. Don’t wait to realize too late that you need help. Immediate assistance with assessing your business finances permits anticipation of cash shocks and devising a plan for handling them.

Improving Business Cash Flow

Among the areas to scrutinize in your business finances is profitability. If profit has slipped or been nonexistent, identify the causes and the best course of action. This typically entails addressing the issue on multiple fronts. For example, your primary aim for raising cash is generating sales revenue. But you may also need to cut some costs, which should not be those that jeopardize sales. Collecting revenue means being on the lookout for opportunities to implement changes. This could mean raising your prices, perhaps by adding some freebie services. Alternatively, you may need to offer discounts to attract more buyers.

Making a sale doesn’t necessarily mean receiving cash. Be sure you are billing promptly and tracking the amounts receivable for every customer. If you don’t already have multiple payment platforms, now is the time to establish them. Being paid online saves you time from any collection effort. Taking credit cards assures that customers are using their own financing avenues rather than expecting your business to carry their debt.

Business Cash Flow Planning

Being prepared for navigating cash flow management necessitates anticipation of upcoming cash needs. Creating a cash projection gives you a plan to foresee payment obligations in the months ahead and to have a target for needed cash inflow. Knowing the hidden cost of taxes is vital. Be aware of tax deadlines for your business and get assistance with calculating the expected amounts. Late payment of taxes results in severe penalties.

The unexpected is greatly unpleasant for any business owner. Because these events are impossible to predict, the best thing you can do is focus on implementing measures for cash flow recovery. Essential in this process is the reliance on the expertise of accounting professionals for assistance with having up-to-date records, monitoring of results from your efforts, and planning for cash flow in the near future.

3 Tips for Continuing as a Solo Entrepreneur

Every business owner wants to grow from starting with merely an idea. But plenty of entrepreneurs want to stay small enough to avoid the headaches that arise from hiring and supervising employees. Continuing as a business of one necessitates an accounting system that measures your compliance with three main objectives.

Firstly, focus on a niche you can serve by yourself. Being selective about who you want as customers results in having a group that regularly buys from your business. You won’t spend time marketing if you have a few customers who value your business because you treat them like gold. It’s up to you to keep track of how much you value these customers. A system is needed to track the profitability of each customer by monitoring their buying patterns to assure they keep purchasing enough and at the right price.

Secondly, don’t create a huge range of products or services that overwhelm your time. Commit to what you know best. When you specialize in a few products or only one, your costs stay low. Stick to a few things at which you can present yourself as an expert.

The third element to solo entrepreneurship is being able to outsource everything for which a larger enterprise requires employees. Fortunately, freelance services are available for a range of operational matters. You may subcontract with specialists in your field who can fulfill the services you sell. If you sell products, shipping services will pick up orders at your location for delivery to customers. The right accounting system assures constant evaluation of who your customers are, what you sell to each of them, and your costs for each.

3 Business Costs to Scrutinize After a Crisis

After an unexpected financial shock to a business subsides, a cascade of new challenges impose unfamiliar burdens on the entrepreneur. Successful navigation of a return to normal demands distinctive planning skills.

Production Costs

Order fulfillment is perhaps the greatest issue confronting business restoration after a crisis setback. Before getting paid by customers, you have to endure the costs to deliver whatever you’re selling. Delivery to customers entails meeting production deadlines, which requires time and resources. Depending on your industry, you may have to plan for staffing, warehousing, shipping, and inventory expenditures.

Monitor an upward trend in sales on your business financial statements. Compare the growth between various equal periods, such as months or calendar quarters, to identify if the rate of increase is escalating. When this pattern is discovered, action is necessary to plan for additional resources. You’ll need third parties whose services can be enlisted for aiding production.

Making early connections with key outside resource providers is crucial for success. You need to engage in a vetting process by conducting due diligence evaluation of each potential source for staff, equipment, shipping, software, supplies, and inventory. This is not a cost-cutting exercise. Rather, you’re engaging in a plan for cost expansion. But you must assure that the new expenditures result in efficiency.

If you’ve built relationships with the right third parties, your production costs should remain consistent as a percentage of sales. This means keeping close watch on a steady gross profit margin. That’s how you’ll know that increasing production costs are not outstripping sales growth.

Overhead Expenses

The higher profits associated with returning to conventional scale are a consequence of rising net profit margin. That’s because your general overhead costs, unlike production costs, don’t rise at the same rate as your sales increase. Nevertheless, some general administrative expenses are likely to escalate.

Customer service is the most common structural implication of restoring sales. New customers need attention. But you certainly cannot afford to neglect old customers. As the business founder, you will likely be tasked with more customer contact as your operation grows. This means preparing to relinquish many of the things you previously did yourself. That’s when you should rely more on the services of outside experts for such matters as bookkeeping, advertising and promotion, and payroll preparation.


The last, but most important, cost to scrutinize is tax compliance. This area must be your top priority in a growth environment. A business owner has sole responsibility for all tax obligations. But helpful assistance is available for the asking from your accountant. Be sure to obtain consultation about rising taxes as your business grows. Precise records are necessary to determine amounts and remittance dates for income tax, payroll taxes, and sales tax. Fortunately, automation is available that aids in tax calculations. But its proper use requires instruction. You must be knowledgeable about readying reports from these systems to spot mistakes and assure accuracy. So, this is yet another area where accounting professionals can teach you about optimal use of financial statements.

How to Calculate Return on Business Investment

One of the most practical discoveries by an entrepreneur is the profitability ratio, called return on investment or ROI. Unfortunately, the deployment of different methods for measuring ROI creates confusion. One of the common procedures for determining ROI is dividing profit by business assets. Another process is dividing by net assets, which is the equity capital of the enterprise. This ratio is usually called return on equity, or ROE.

Your business equity is assets minus liabilities. That is, take what the business has (such as cash and equipment) and subtract what the business owes (such as a loan or credit card debt). Say you have a basic service operation that has a computer that cost $600. But you charged the computer purchase on a company credit card and still owe $100. In addition, you keep $9,500 in a bank account to provide cash flow to pay expenses until customers pay you. The business assets are $10,100 ($9,500 plus $600), but the business equity is $10,000 ($9,500 plus $600 minus $100). When your business has a profit of $50,000, the ROI based on assets is 495%, and the ROE is 500%.

Obviously, capital-intensive businesses have much smaller ROI because they need more assets. These organizations may need $250,000 of assets to generate $50,000 of profit. That delivers a 20% ROI. Regardless of the type of enterprise you operate, tracking ROI or ROE uncovers your business trend. This is different than merely examining dollar profit. A rising profit can trigger lower ROI and ROE if you need much greater assets to attain that profit. This result signals potential trouble from insufficient resources.

Make Financial Statements a Tool, Not a Burden

Sound business decisions are molded by knowledge of conditions in the same way that a downhill skier successfully traverses the mountain in an Olympic event. Sufficiently detailed information bestows insights that enhance wise decision-making, especially in challenging conditions. By contrast, imprecise information bends itself into false conclusions.

Unfortunately, business owners can make errors because they don’t derive enough information from their financial records. Poor judgments about where to allocate time or money correlate with the misunderstanding of past spending decisions. An efficient reporting process is the first step to having useful financial order rather than a blizzard of numbers.

Accounting Records Depth

The benefit of financial statements dissolves with haphazard details. For instance, recording costs associated with each product or service is a standard deserving of careful attention. In some industries, having the costs for each project is relevant. Leaving your bookkeeper in the dark about these specific elements results in less refined financial statements.

This technique of classifying costs enables calculation of profit margin for every line of business or a particular job. It further assures consistency that permits comparison of expenditures and profit across multiple periods. A service business should examine the profitability of each job and every client. Product-related enterprises must understand the profitability of various product lines as well as customers. These data permit informed decisions about raising prices and ceasing unprofitable business lines or relationships.

Consideration of the accounting method is vital. Accrual basis accounting is best for analysis because it matches revenue with corresponding expenses. Sales count as income when invoiced, and expenses are recognized as they are billed. Cash basis is commonly used for income tax purposes because revenue only counts when it’s collected and expenses are recognized only when paid.

Accounting software can produce either accrual basis or cash basis statements. Use accrual basis for evaluation, since it eliminates profitability discrepancies, which are triggered by timing differences between collecting revenue and paying associated expenditures. But you may use cash basis for income tax reporting.

Financial Statement Timeliness

Financial statements for periods that passed months ago are of little relevance. Superior decision-making requires recent information. Evaluation of results for the preceding month should occur soon after the month’s end. Bookkeeping services are often late in providing financial reports because they’re relying upon business management for key information. Delays in giving bookkeepers what they need will ultimately result in receiving stale financial data.

The responsibility for a company’s numbers rests with the owner. Bookkeepers cannot invent figures, but a business owner may provide estimates or guidelines for bookkeeper estimations that are corrected later. The aim is rendering of financial statements in time for prudent evaluation. Follow up with adjustments, but do not make perpetual changes to long-ago periods. And especially do not alter past-year bookkeeping after the income tax return is completed.

The only sure method for making effective business decisions is possessing accurate and timely financial statements with optimal formatting for easy analysis.

How to Mark Up Your Price Based on Gross Margin

A crucial factor in pragmatic business management is knowledge of gross margin. This term is commonly connected to markup, which compares the price your business receives from selling an item to the cost incurred to obtain the item. Not every business, of course, sells specific items. But all businesses have direct costs that are absolute necessities for delivering sales.

Gross profitability ignores general overhead costs. Those are the operating expenses a business incurs even if nothing is sold, such as rent and telephone service. Direct costs are the necessary expenditures to make a sale happen. These are things like materials and the labor cost for the specific time allocated to complete a sale.

Gross margin, however, is a bit different than gross profit. Margin is a percentage. If you mark up something 1.5 times above your cost, the price you charge is $150 if your costs are $100. Gross margin equals price minus cost divided by price. It’s your markup amount divided by the sales price. Notice that the gross margin in this example is 33.3% ($150 minus $100 divided by $150).

The objective is to maintain a consistent gross margin. How you accomplish this as costs change means adjusting your price. This requires identifying a markup that corresponds with the gross margin you want to maintain. Simply turn around the relationship formula to show that markup is 1 divided by 1 minus gross margin. So if you want to keep a 33.3% margin, you have to markup your costs 1.5 times, that is, 1 divided by 1 minus 0.333.

The Vital Process of Account Reconciliation

Everyone makes mistakes, especially when confronted with the labyrinth of bookkeeping entries, but catastrophe is avoidable by deploying a common process for locating and correcting errors or omissions. Reconciliation of bookkeeping entries to bank records assures that your books contain all the transactions that occurred in the account. Moreover, reconciling uncovers other crucial elements that demand scrutiny.

Fortunately, accounting software has made the reconciliation process a simple task. But the automated nature of this procedure commonly results in failure to diagnose and resolve questionable bookkeeping issues.

What and When of Account Reconciling

Reconciling to a bank statement should be conducted every month. Reconcile every account, including all checking or other bank accounts as well as credit cards and loans. Transactions you’ve recorded in your bookkeeping for a specific account will appear on a statement from the financial institution for the same account.

You’ll know that your records are accurate when the account balance on your books agrees with the bank. This happens by matching the transactions according to the bank statement with identical transactions you’ve recorded for that account on your books.

Agreeing with the bank statement doesn’t mean you will necessarily have the same account balance as the bank. You may have some outstanding checks that have not yet cleared the bank and won’t show up on the account statement. The bank doesn’t know about these checks.

Similarly, some electronic transfers you’ve recorded in your bookkeeping may have taken place at the bank a day or two after the bank statement. Reconciliation is all about bringing into the open these outstanding transactions.

Why and How of Account Reconciling

A part of the reconciliation journey is the discovery of transactions recorded by the bank that you have previously omitted from your bookkeeping. Moreover, uncovering non-reconciled items is particularly important. Some checks you’ve written may have never been cashed. You don’t want to simply delete them from your bookkeeping.

These expenditures may have already been deducted on income tax returns or reported to lenders. Adjustments are required on your current financial statements to correct prior period changes. An accounting professional will assure accurate accomplishment of this step.

Outstanding deposits from many days prior to the bank statement’s ending date are indicative of obvious mistakes. If you really made the deposit, it will appear on the bank statement. Your business sales are overstated if you entered deposits that never really arrived at the bank.

Reconciliation also reveals bank encoding errors and fraudulent activity. Contact your bank immediately if you notice any of these problems.

Duplicated entries are another cause of reconciliation discrepancies. Bookkeeping is a double-entry system. Recording a bank account transaction for payment to a credit card accomplishes both sides of the same event. This single entry is reconciled with both the bank account and credit card reconciliations.

Likewise, entering a deposit of borrowed money simultaneously records the loan. Obtaining a loan history from a lender permits seeing if your books agree with the lender’s information.

Assure that all loan payments from the bank account are applied to both the loan account and interest expense.


Never Stop Assessing the Warning Signs of Trouble

All entrepreneurs are aware that startups fail at a high rate, but they should also remain ever vigilant with evaluating ongoing risk of failure. Pragmatic monitoring of a few key factors is vital to avoiding perils that can sink a business.

Knowing your customers may seem obvious, but too few business owners understand how to accomplish this correctly. You have to truly become aware of why your customers are doing business with you. Know what concerns are on the minds of your audience and how you are addressing those issues. Without this information, you cannot expect to capture and retain customers from your competition. Accounting software can be used for tracking sales patterns and other information about your customers.

Focusing exclusively on your business revenue from customer sales is a fragile exercise. Although your sales total is an important number, you cannot afford to lose sight of everything in your financial information. Your accountant can help you understand trends and conditions as these elements are tethered to successful growth. Most crucial is judicious oversight of cash flow. Responding to an opportunity for higher revenue means knowing how to spend for serving that growing customer base. A frequent necessity is having to implement changes in your spending, create a revised budget, and monitor future results.

Market forces are in constant flux because consumer tastes change and technology changes. The wise entrepreneur gets ahead of these transformations by analysis of developments unveiled within the financial statements of the business. The best entrepreneurs react quickly and hustle into action when spotting the warning signs of trouble.