In 2020 I wrote a blog post about your options if your cash flow was not adequate to pay your payroll tax deposits. These options are bleak – cut your payroll, close altogether, or the head-in-the-sand approach of just hoping things will improve. I did leave out one major idea – fix your cash flow.
Identifying the Real Problem
Cash flow problems come from two sources. Either you are profitable, but the timing of inflows and outflows is off. Or you are not profitable enough. When it comes to timing problems, the answer is simple – speed up collections or defer payments (hopefully to someone besides the IRS). The lack of profits is a much bigger problem and must be solved or you will be out of business.
What Can Be The Fix?
Most small business owners do a good job at avoiding unnecessary expenses. This is because they are highly incentivized and deeply involved in operations. It’s not likely that they will find salvation by cutting costs. Most of us miss the single area of our business that can have a big and immediate impact on profits – our pricing. One study from some years back reported that the average small business spends approximately 8 hours per year working on its pricing policies. Yet, a small increase of just 1 or 2 percent can have an impact in the area of 8 to 10 percent on pretax profits.
There are multiple ideas on how to raise your prices without driving off your customers. Some of them include:
- Offer new products or services to existing customers (the new and improved approach).
- Bundle your existing products and services.
- Switch the subscription model for services.
- Allow your customers to design their bundle of services by providing a menu on your website.
- Use psychology to make your price seem smaller.
- Change your marketing message to emphasize the value of the product or service to the customer.
These are just a few pricing ideas. My pricing manual has over 25 different pricing models that are worth considering. The main point is that you have to do something, and pricing is your best bet at fixing your cash problems.