That’s it! You have made the decision to go into business for yourself and live your passion. You have found a catchy name for your small business, designed a logo, completed a market study and developed a marketing plan… Or do you simply have the wind in your sails and are preparing to develop new products?

Now you’re at the stage of pricing your products. How do you go about it? The first step is to accurately calculate your costs.

The cost price represents all the direct and indirect expenses that your company will incur to manufacture a product or offer a service, as well as the profit margin. It allows you to determine the gross margin and to establish a selling price.

The cost price includes:

• Production costs
  These include all the costs necessary for production: the cost of purchasing raw materials, staff salaries, the quota-share of depreciation linked to production, as well as other variable and fixed costs that may apply, such as rent, electricity consumption, etc.
• Production purchase costs
  These relate to the supplies used during production: delivery costs, customs duties, etc.
• The cost of product and service distribution
  These are all the costs linked to the marketing of the product or service: advertising costs, transportation costs to the point of sale, packaging costs, etc.
• The administrative costs of producing a product or service
  These are the costs related to the support and administrative functions of the company (after-sales service, general services): the salaries of the management teams, the accounting department, etc., the quota-share of depreciation of the equipment used by these services.

Regardless of the size of your company or your sector of activity, calculating the cost price is a fundamental tool for setting the selling price of your goods or services. Once determined, you can try to reduce it as much as possible, in order to increase your profit margins. It is an essential tool for your business plan, one that gives you a head start when it comes time to apply for financing.

The calculation of the cost is done according to the direct and indirect expenses of your company. It must be determined for each product or service you offer. It is calculated by adding the direct and indirect expenses, then dividing the sum obtained by the quantity of goods produced or services rendered.

Let’s take the example of Julie, owner of a woodworking shop. For her first year in business, she has decided to offer only tables.

If the direct expenses to produce 100 tables are $25,000 and the indirect expenses are $40,000, the cost of production will be calculated as follows:

(25 000$+ 40,000$) / 100 = 650$

The cost of Julie’s tables is $650.

This calculation allows Julie to know the unit cost of her tables, and to set the selling price so that her business can break even. Julie will then have to determine the amount of margin that will allow her to make a profit from the sale of her tables.

If Julie wants to offer other products to her customers, such as chairs, she will need to allocate her business costs to her tables and chairs to determine the cost of each product.

The advisors at your local SADC and CAE are there to support you in this crucial step, to help contribute to the profitability of your business. They will help you demystify each step and make the process of determining the cost price simple, or almost!

Julien’s landscaping business is booming. The phone doesn’t stop ringing and the customer base has doubled in the last year. Julien needs to hire 4 additional employees to meet demand and honour his contracts.

To help him cover the increase in his payroll, he needs financing. He applies for a loan from his bank. He receives a negative response from the financial institution. Why? The company’s liquidity is insufficient. A large part of the liquidity of Julien’s young company is, in fact, immobilized in the equipment. This is a concrete example of how liquidity affects a company’s ability to grow.

It takes money to make money! It is essential to have working capital that matches your ambitions, and to be ready in the event of unforeseen events or exponential growth, as in Julien’s case. In order to establish a realistic growth plan, it is always best to anticipate and plan when it comes to cash flow.

Here are 7 tips to help you manage and optimize your business’s cash flow:

Knowing how much money comes in and out of your business is essential to understanding and managing your cash flow. Analyze your cash flow regularly to make sure you always know where your money is going and how much you have.

Having a budget for your cash flow will help you understand your financial situation and plan for future spending. A cash flow budget will help you track your business expenses and prevent you from running out of money.

Negotiating payment terms with your suppliers can help you manage your cash flow and ensure you don’t run out of money. It’s also important to negotiate payment terms with clients, so you receive payments on time and have enough money to cover your expenses. Additionally, you can consider options like factoring, invoice financing, and lines of credit to help increase your cash flow.

Reducing costs is a great way to increase your cash flow. Look for ways to reduce expenses, such as by renegotiating contracts with suppliers or finding ways to reduce overhead costs.

Increasing your income is another great way to increase your cash flow. Consider ways to increase sales, such as launching new products or services, or offering discounts or promotions.

Using technology can help you streamline processes and save money. Investing in software and automation can help you save time and money, and manage your cash flow more effectively.

Monitor your cash flow regularly to ensure you always have enough money available to cover your expenses. Review your cash flow statements and balance sheets regularly to ensure you are aware of any changes in your financial situation.

To transform this advice into concrete actions, and adapt them to the reality of your business, the advisors of your local SADC and your accountant are your allies.

INFLATION:  a continued rise in the general price level……. according to the Merriam-Webster

This increase will have been 8.1% over 12 months (June 2022). It will be long remembered as the largest annual change in the Consumer Price Index (CPI) in almost 40 years, according to Statistics Canada, particularly for SMEs.

Small and medium-sized businesses face many challenges, such as labour shortages, which lead to wage increases, higher procurement costs, and less flexible suppliers.

In short, input costs are going up and profit margins are going down. These impacts of inflation put the financial health of businesses at risk.

While you can’t control inflation, you can implement strategies that will help you fight inflation and protect your small business.

In order to implement winning strategies, you must first have a clear picture of your financial situation. The more accurately you know your market and your situation, the better able you will be to make the right decisions.

Knowing the cost of each product or service is essential at this stage.

Even if you have already done the exercise, several variables change simultaneously in the current market, including input costs and salaries. It is important to have a clear view of the current situation.

Doing so will allow you to determine whether some of your products or services are less profitable or even losing money. With this information in hand, you can implement the following action.

Are some of your products or services very profitable, while others are eating into your profits? Consider keeping the more lucrative ones.

This is a difficult decision, given that you have always offered a wide variety of services and products to your customers?

Be transparent; customers will appreciate it if you tell them why a product is temporarily unavailable.

You offer free delivery for purchases over a certain amount and your shipping costs have skyrocketed?

Consider increasing the purchase amount for free delivery or offering a discount when customers pick up their order in shop.

Your suppliers have a direct impact on the cost of your inputs and therefore on your profit margin.  They too are affected by inflation: price increases, transport costs, shortages of certain products, etc.

In order to secure supplies, guarantee the price of purchases and demonstrate your commitment to your suppliers, why not sign longer-term supply contracts with them?

Your suppliers will be grateful for the trust you place in them and, as a result, will be more inclined to negotiate. It all starts with a solid relationship!

A few adjustments can sometimes make a big difference!

Efficient working methods can save you time and money.

For example, did you know that by investing in digital transformation, productivity increases 15% to 25%?

You generate more products or services without having to work longer hours or hire more employees.

The cost may seem high at first, but investing in new technology will save you money in the long run.

To save money in the short term, consider working on the quality of your service. This will help limit replacements and returns. This is a simple but effective way to protect your profit margin.

“Nothing is permanent except change” stated Heraclitus.

Wear your creative entrepreneurial hat to innovate and think of ways of optimizing or changing your manufacturing methods to reduce your input costs.

Involve your employees; two or more heads are better than one.

Beyond the five actions suggested to protect your small business from the effects of inflation, there are many other strategies that can be initiated.

The consultants at your local SADC are there to support you. They will be able to guide you and help you find solutions adapted to your small business.