Determine what forced you into debt in the first place
When you analyze your business, what forced you to borrow in the first place? Has everything you purchased had a purpose that helped drive revenue for your core competency? If you have a lawn mowing business and some of your debt is for ladders to clean gutters out. Seems like a needless purchase that not only cost interest, but takes away from the core competency or revenue generator for the business.
Having trouble making payroll? Are you running an efficient enough business? The sales should more than cover the costs of payroll and hopefully future investments into the business.
If a business doesn’t take the time to reflect on where the debt is coming from, this cycle will most likely repeat itself.
How many businesses do you know whom price based on what their competition charges. 9 times out of 10 that business did the same thing. However, neither company factored cost plus or value based pricing. This can quickly lead to debt and more importantly losing the business.
There are two basic methods of pricing your products and services: cost-plus and value-based pricing. The best choice depends on your type of business, what influences your customers to buy and the nature of your competition.
This takes the cost of producing your product or service and adds an amount that you need to make a profit. This is usually expressed as a percentage of the cost.
It is generally more suited to businesses that deal with large volumes or which operate in markets dominated by competition on price.
But cost-plus pricing ignores your image and market positioning. And hidden costs are easily forgotten, so your true profit per sale is often lower than you realise.
This focuses on the price you believe customers are willing to pay, based on the benefits your business offers them.
Value-based pricing depends on the strength of the benefits you can prove you offer to customers.
If you have clearly-defined benefits that give you an advantage over your competitors, you can charge according to the value you offer customers. While this approach can prove very profitable, it can alienate potential customers who are driven only by price and can also draw in new competitors.