Undercharging and credit services hinder the growth of a business

Aug 15, 2008

When first starting out, many business owners tend to undercharge for what they sell. This is mainly because they don’t know how to correctly set an effective price and they think they need to have the lowest price in order to get business.

When first starting out, many business owners tend to undercharge for what they sell. This is mainly because they don’t know how to correctly set an effective price and they think they need to have the lowest price in order to get business.

Both circumstances result in low profits and poor cash flow. These “bad habits” frequently continue even after the business has gone through its start-up phase.

To many business people, as long as they get a mark-up of 10% on what they are selling, they think they are okay. Most times they confuse gross profit and net profit without taking into account the operational costs like rent and salaries. For example, if someone buys 10 cartons of bar soap at sh50,000 and he sells it sh50,200, ideally he would have got sh200 extra, but not enough profit to break even to cover his transport and all other costs incurred. This is the situation for a lot of our businesses more especially where many people sell similar products and price differentiation is hard.

Another problem small businesses face is in an effort to increase revenue, business owners extend credit to customers who pay late, or worse, never pay at all. While nearly all businesses have their share of late or uncollectible accounts, it’s important to minimise bad debts and slow paying customers by reviewing credit policies and picking and choosing customers wisely. If selling on credit, be sure to perform credit checks on all of your customers. Also, make sure your customers completely understand and agree to your payment terms BEFORE doing business with them.

While it may be attractive to take on as much business as possible, keep in mind that it’s better to have your stock in stores than to give it away to people who will never pay back.

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