BUSINESS RESOURCES + TOOLS
BARE BONES BIZ Ask Ellen
BY ELLEN ROHR CONTRIBUTING WRITER L 20
et’s open the mailbag! I get lots of e-mails from folks trying to clean up an accounting mess, solve a business challenge or just make more money. Sound
familiar? Read on.
Dear Ellen, I’m new to business. Is it a good idea to offer a lower price
than the “going rate” when first starting out, to attract new customers?
— Sincerely, The Newbie
Dear Newbie, Yikes! You just can’t compete on price. Forget it! There
will always be someone who will charge less than you will, even if they have to pay to do the job. Also, the market is much less price-sensitive than you think it is. Can you believe $50,000 for a watch, $3.00 for a bottle of water, hundreds of dollars for Lady GaGa tickets? Consumers will buy just about anything, if they can see the value or benefit. Here’s a sure-fire, make-your-dreams-come-true
formula for making money in your business: First, how much money do you want to make? How
much money will it take to make all the headaches of small business ownership worth it — $40,000 per year? $100,000? $750,000? Pick a number. How many hours can you sell in a year? Suppose you
sell four billable hours a day, five days a week, for 50 weeks. 4 x 5 x 50 = 1,000 billable hours a year. Then, crunch the numbers. If you want to make
$100,000, it will take $100 per hour just to cover your salary. Add to that all the other costs of doing business. Inflate for profit. Voila! You have a selling price that makes sense and makes money. Learn to market yourself and eliminate price
competition forever. The market doesn’t set prices, marketers do. What makes you special? Look at what the low-price providers may sacrifice. To charge more, you must be different and better. Try “clean, sober, on time and dressed right.” Keep a sharp eye on the money and on your time. Track
every penny in and out of your company. Run a balance sheet and income statement — every week. Measure the difference between what you thought you would sell and spend (budgeted) and what you actually sold and spent. Most folks look to their competition and base their
selling price on what the other guys are charging. If most businesses fail — and they do — what makes you think your competition knows all that much about making money? Crunch the numbers. Charge what you must.
Dear Ellen, My friend recently asked me to join him in his plumbing
business. He started last August, and he is breaking even on about $25,000 a month in sales. He doesn’t have any
Learn to market yourself and eliminate price competition forever. The market doesn’t set prices, marketers do. What makes you special? Look at what the low-price providers may sacrifice. To charge more, you must be different and better. Try
“clean, sober, on time and dressed right.”
business management expertise, but he does have the technological skills to provide good service. I have an MBA and feel that I can help manage the growth of this business. My questions are: How do I determine the value of this
service business and what is a fair amount of ownership to take in exchange for my services?
— Thanks, College Boy
Dear CB, Great questions. This could be a great business move ...
or a nightmare. Let’s explore. What’s the company worth? Most valuation formulas
are based on earnings, i.e., profits. Or you can assess the worth of the tangible assets: land, building, inventory. Another valuation method is to determine what a buyer is willing to pay for the company. Are you getting the idea that this valuation business can be pretty subjective? Maybe you could hold off on the ownership piece for a
few months. Could you work for the company for starters? That may be the easier way to “date before you get married.” Have a meeting with your friend. Work out several pro
forma budgets; good, better, best and worst case scenarios for sales and expenses. Discuss how much money will make all the risk and headache worthwhile, for each of you. What is your time worth? Plug the compensation numbers into the budgets. What's it going to take in volume to support your salaries? Who will be responsible for what? Work it all out in the pretend world first. Put a simple business plan together. (Check out
www.barebonesbiz.com for more biz planning tips.) Then you can do a little more research on how to structure a win-win deal. Also, figure your way out before you go in. People die,
fight, change their minds, get divorced, get sick, get well, experience religious transformations, go mid-life crazy...you name it. Structure a buy-out arrangement in the initial contract. Address non-compete issues and confidentiality agreements. Consider key-man insurance for the main players. Ultimately, business is a risky adventure. Improve your odds by looking before you leap.
e Turn to E. ROHR on p 22
phc february 2011
www.phcnews.com
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