As an entrepreneur, you often wear multiple hats in your business. You are facing a multitude of challenges every day, and most of them have financial impacts. Whether you’re introducing a new piece of software to your app stack, investing in your professional development or organizing a party for your team, it often boils down to key financial decisions that can shape the future of our businesses.
As a business owner, you make hundreds, if not thousands, of decisions each day. Unbelievable, but true. Fun fact: studies showed that as individuals, we make 30-35,000 decisions a day!
In this blog post, I share insights into three pivotal financial decisions that every small business owner will likely face at some point in their business journey. You’ll see that these are not just financial decisions but strategic moves that can define your entrepreneurial journey.
Pricing strategy
Lynett’s cleaning service was a hit in her community, thanks to her unwavering attention to detail and exceptional customer service. Yet, determining the right price for her service was a real challenge. Charge too little, and she risks undervaluing her service and hampering profitability. Charge too much, and her customers might look elsewhere.
Lynett put some work in and conducted a market analysis to determine her position in the marketplace. She also did the math: she considered her costs and overhead, her gross and net profit, and her break-even point. More importantly, Lynett also considered the psychological aspect of pricing, setting her rates at a point that reflected the quality and reliability of her service without pricing out her target market.
She finally found her sweet spot and crafted a pricing structure that captured the quality and reliability of her service. She introduced tiered pricing to cater to different customer needs, enhancing her market appeal. Lynett’s case highlights that effective pricing strategies not only ensure profitability but also communicate the quality and positioning of your service in the market.
Setting your prices is one of the most important decisions you make. It has a profound impact on the operation of your business and, obviously, on your profitability.
Please remember that pricing is a process. For Lynett, it took almost eight months from realizing that she needed to change her pricing to introducing her new pricing.
đź’ˇ Quick question for you: Does your pricing structure reflect the unique flavour of your business?
Hiring a Professional
My other client, Sofia, launched a boutique marketing firm several years back. It had been growing steadily, and with growth came increased financial complexity. With a background in finance, she managed her business’s finances initially.
However, as the firm grew, so did the complexity of its financial needs and the time required to sort all financial issues, pulling her away from her primary passion and expertise: marketing.
This demanded an important decision: should she continue to handle the finances herself or hire an expert?
The DIY approach had the advantage of being cost-effective, offering Sofia full control over every financial detail. However, it was incredibly time-consuming and often stressful, with a steep learning curve on more complex financial matters.
Ultimately, Sofia engaged a part-time CFO, allowing her to focus on the core activities of her business while benefiting from specialized financial strategies, new financial management tools and processes that the CFO introduced.
For small business owners, a decision like this depends on various factors, such as the complexity of the business’s finances, the owner’s proficiency in financial management, and the cost versus benefit of hiring a professional. While the DIY route may initially seem cost-effective, the value of professional advice and the time saved can significantly outweigh the costs, especially as the business grows.
💡Quick question for you: Are there areas in your business where teaming up with a specialist could enhance your effectiveness?
Investing in Growth
Kaitlyn, a successful caterer, reached a turning point two years into running her business when the demand for her services outgrew her kitchen’s capacity. It was clear that to keep up, she needed a larger kitchen space equipped with industrial-grade appliances.
The decision to invest in a larger space with better equipment was significant. It promised greater profits but required tapping into her reserves, which could leave her business vulnerable to unforeseen expenses.
Kaitlyn’s dilemma is a classic case of investing in growth versus maintaining liquidity. On the one hand, investing in your business is essential for scaling up and capitalizing on opportunities. While on the other, the liquidity, the availability of cash on hand, is your business’s safety net. It ensures you can cover unexpected costs without spiraling into debt.
Making this decision requires much consideration and the outcome may be different for another entrepreneur. So please do not rely solely on your business friend’s or mentor’s advice. What worked for them might not be working for you. Do the math and weigh in other factors as well. Like how you can cope with not having enough in your emergency fund, what additional resources (people, supplies, licences, etc.) you need for a scaled-up operation.
After careful consideration, Kaitlyn decided to proceed with the expansion but with a phased approach, purchasing essential equipment first to gradually increase her capacity while retaining a portion of her liquidity. Additionally, she negotiated payment plans with her suppliers to spread out the expenses and applied for a small business loan to bolster her cash reserves.
Kaitlyn’s approach underscores the importance of a balanced strategy that supports growth while preserving financial stability.
💡Quick question for you: what’s your next big move?
Takeaway
Financial decision-making is at the heart of entrepreneurial success. Whether it’s fine-tuning your pricing, deciding on financial management strategies, planning for growth or something else, these decisions require a thoughtful approach.
By making informed decisions that align with your long-term business visions and goals and ensure you maintain or increase your business’ profitability, you lay the solid foundation for a robust financial future and sustainable growth.
As you encounter financial decisions, remember that each is a stepping stone towards building a resilient and prosperous business.
I believe in You: you’re a champion 🏆
