Ask Ellen

BY ELLEN ROHR
contributing writer

Let’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 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.

Dear Ellen,

My husband and I run a small plumbing and heating business. For the first time ever, we are going to accept credit cards. The credit card company requires that we provide them with our “refund policy.” Can you help?

— All the best,
Carol Cautious

Dear Ms. Cautious,

How about, 100% satisfaction or 100% money back? Why not? Vow to resolve every customer complaint to the customer’s complete satisfaction, including a full refund, if that’s what it takes.
When you put together your budget, add an account that reads “Customer Satisfaction Costs.” This is an expense category for money (dinner tickets, carpet cleaning, whatever) that you give to the customers to make ’em happy. This won’t be more than 1 – 2% of your total sales. Some folks are just bad customers. Expect a few and budget them in.

For big jobs, build payment points throughout the production, to keep cash flowing and to spot — and resolve — dissatisfaction before the job is finished.

Join me for the 12 Step - Step by Step Success program. The power of one simple, focused action, one step at a time. Check out www.StepByStepBusinessBuilding.com. Reach me at 417/753-1111 or contact@barebonesbiz.com.