We’re going to talk today about the only thing an Entrepreneur can do to handle this situation. We’re going to discuss your response.
Let’s remember that there are very few things that any business owner can do. The only things we can control are the Four P’s or Product, Price, Promotion, and Place.
That’s it my Brothers and Sisters. We’re extremely limited.
The economy is one of the Five External Elements that are completely outside of our control. These situations can only be responded to.
And the only response possible is increasing your markup to maintain your margins.
In order to explain, let’s use an example. Joanne B. Owner has a retail store. She does $1M per year and maintains a 100% markup on the products she purchases for resale.
In other words, if she pays $1 for something she sells it for not less than $2. After paying all of expenses, between her salary and distributions, she normally takes home 10% of her gross or $100K.
A substantial portion of her inventory is imported goods, and the pricing increases from the new tariffs hit her suppliers, so her average Cost of Goods Sold increased by 10%. What will she do in response?
She has several choices that include…
1 – Leaving her prices where they were. She thinks that she can make up the difference in volume by having lower prices than her competitors.
2 – Meeting the price hike half-way, or only increasing her prices by 5%. This would put her average sales price on a $1.10 item to only $2.10.
3 – Or she maintains her 100% markup and charges $2.20 on anything costing $1.10.
There are arguments for all three of these scenarios.
Let me leave you with this…
What would you do? Try to make it up on volume, go half way, or maintain your markup? She only has 10% in profits. She could end up working for nothing.
Those who chose either leaving their prices as is or going half way forget one of the oldest maxims of business. It’s the fact that overhead goes up rather than down.
The same pressures Joanne is feeling in the retail markets are going to be felt by all of her suppliers. Again, no one is immune.
Insurance, rents, utilities, and anything else you can possibly imagine has the same pressures. Maybe not to the same extent, but those prices will certainly go up as well.
Even if you’re talking about a supplier who is labor only, they’ll need to pay their people more to get them through this crisis and not have them poached by their competitors. As such, this labor only supplier will need to increase their prices as well.
Don’t screw with your formula for success. Put it out of your mind and just fahgetabadit.
Some might say something like, but what if my competitors don’t follow suit? What happens if they don’t increase their prices as well?
Then they’ll be the first ones filing bankruptcy, and you’ll be able to pick up a substantial portion of their business.
I’m telling all of you now that this isn’t going to be easy. Economic situations like this are always hard. It’s going to take every bit of stick-to-it-tiveness you have. You’re going to need to stick to your guns if you plan on making it through.
But like it nor not, this is the job. This is what you signed on for.
These sorts of situations hit small businesses harder than anyone else. We aren’t large businesses that can sell more bonds and issue more stock to cover our losses. We literally can’t print money.
We need to get it done the old fashioned way by maintaining our profits.
If not, your business will turn into a not-for-profit. And that’s exactly what no one signed on for.
This isn’t going to be easy, but know that we’re right there with you. So let’s dig that hole, shoulder that weapon, and get it done already.
If you need to talk, I’m here.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.