Effective Pricing Will Boost Cash Flow and Save Your Business
By Stephen King
Economic headlines are dire. Through September, nearly 100,000 U.S. businesses had closed permanently, and no one knows if the end is near. For business owners, it’s a “circle the wagons” moment—executives and management are asking how to stay open until good times return. My advice: Focus relentlessly on improving cash flow and boosting profit. Most of the following strategies are easy to implement, many are free, and all can be launched immediately (if not sooner).
Pricing Strategies in a Recession
I’ve survived six recessions. In my experience, the secret to survival is to focus on cash flow. Profit doesn’t matter yet—you can be hugely profitable but have no cash (making the IRS happy and you miserable). But even before focusing on cash flow, pricing must be understood and optimized, so be sure to get this right.
Calculate the Gross Profit Margin (GPM)
A business can’t succeed without having a firm grasp on its gross profit margin (revenue minus cost of goods sold). This is essential to the most important decision in business—pricing. A GPM of 50 percent means it costs half the product price to make or deliver the product to a customer (with the remaining 50 percent covering indirect costs like taxes and administration).
Implement a Job Costing Procedure
A GPM will never be reliable if job costs cannot be predicted. Payroll is the single biggest expense for most companies, so some sort of employee time-tracking system will be needed to determine product cost.
Experiment with Pricing Models
Prices charged need to cover direct costs and contribute to overhead, ideally generating a profit. But different pricing models may work better in some industries than others. Internal company reporting will help determine which models are best for a particular industry.
Cash Flow Strategies
With cash flow, timing is everything. Here are a few strategies to immediately accelerate and boost your cash flow.
Bills for products or services should be sent the instant it is acceptable to send them. No one will pay you if you don’t ask.
Get a Deposit
Referring back to the GPM discussion, paying a deposit should not be a surprise to any buyer, particularly if something is being constructed.
Automate A/P and A/R
The majority of small to medium-sized businesses still pay vendors and bill clients with some manual processes. It is estimated that sending or paying an invoice manually costs $10 to $15 each—obviously, this hurts cash flow. Automate the process, and you’ll get much more accurate and timely data.
Accept Credit Cards (and Consider Venmo and Zelle)
Everyone knows paying by credit card or by e-transfer is easier than a debit or writing a check. As proof, data suggest that accepting credit cards will cut day sales outstanding by as much as two-thirds.
Manage Interest Rates and Minimum Payments
To conserve cash, consider paying down (or off) credit lines with the highest minimums, or if all are about the same, kill off those with high interest rates.
Get Paid Before Payroll
Because payroll is usually everyone’s largest expense, why not manage it? As part of a good pricing strategy fostering predictable cash flow, consider moving your payroll dates for a better fit.
Never Let Emotion Run Your Business
It is possible to raise prices during a recession—one way is to uncover unpaid work you’re already doing for clients and bill for it. It is also sometimes necessary to “fire” a client, especially if they cost much more time and energy than is worth dealing with. With an effective pricing strategy, you can examine the profitability of all of your clients.
Last but not least, let’s talk collections. The key to good collections is establishing a strict payment policy and sticking to it—no favors. If you seem casual about collections, your clients will too.
Stephen King, President & CEO/GrowthForce