Wow i never expected such great participation.
Ok so what are the origins of my question? Lets get away from woodworking or worrying about the widget.
1) You cannot make any of these decisions if you dont know where you stand financially.
- I would say the majority of small business owners dont set a budget for themselves.
- Then they dont monitor actual cost versus planned cost and actual sales versus real sales.
- Back in my formative years i was groomed in a corporation. I hated the accountants and all they stood for. Thats because i never took the time to understand them and saw them more as an obstacle.
- Most of the small businesses i vist do not look at their financial status on a monthly basis. Instead they run off the cheque book. Do we have money in the bank (yes) ok lets do x and carry on. They hand the shoebox of invoices and receipts to the accountant/bookeeper maybe once a month and hand the accounts to the bank to maintain their line of credit.
- This approach is basically living on a treadmill waiting for lady luck and if she dont pitch up the treadmill gets to stop.
2) If one does set these goals/target (budget) and one holds oneself accountable to these targets and reviews the results then one knows full well when you achieve a point called breakeven. Once you go over breakeven you have profit. To know this though you need to be aware of where you are financially. In my business when i had a financial director, R&D department, Sales, Marketing and Production and IT departments all needing their own budgets and all needing to have responsibility for spend delegated i still needed to know where we were daily. There were controllable expenses and uncontrollable. Rent was a given or we were not in business. But whether or not the IT guy got to buy that new monitor for the person in the buying dept was controllable unless the old one was kaput. What i did astounded my financial director and partner. I used to be able to tell him where we were going to finish in each month financially within a reasonable tolerance for our control over the business. We were exporting widgets to 33 countries around the world in three different industries and we were a small business.
3) The market sets the price. Period. The market will only pay what the market is willing to pay. There is no universal price for everything. Just look at gas in the USA ( a free market). Thats why oil, gold wheat whatever fluctuates daily. Its market priced.
4) The rules are the same for everyone. GAAP makes that rule. (lets not take this down the political road i am talking about business and accounting. Cost is cost and profit is profit for every business big or small.
5) My original intent with this debate is to get the point across of marginal costing. Once you break even and if you are running at break even, meaning if you know for sure that you are making a profit at your current level of sales and all costs, you the business owner or management team have the OPTION (note i said option) to to decide to marginaly cost your product such that the only incremental cost you incur will be the direct cost. Since at break even you have fully recouped your overhead. But to do this you need to know where you are financially and how your business is performing. This has one precurser to it. It assumes that with the current levels of equipment and staffing and raw material availability that you have capacity. If you have to incur additional costs to create capacity you cannot marginally cost.
What do i mean in my term by marginal cost. I mean consider only the direct costs of raw material and labor in my example.
But i see small businesses that do this frequently and wonder why they are running up their line of credit. When you do it without knowing where you are, you burn your own cash. In construction its common practice to at times "buy work" or take a job to keep the lights on and make no net profit. To do that you need to know where you are financially.
6) I notice everyone getting hung up on cutting the price and the impact. Yet as wooworkers we often post deals on our forum. Right now if you look at woodcraft they are selling the NOVA lathe at a $500 price reduction to normal. $500 of a normal list price of $2250. Thats around 22% price cut.
So why do this.? Many reasons abound.
One big one is promotion. You might say this is a loss leader if we knew the costs or a drawcard for them knowing you will buy a chuck and other extras as we have all spoken of when warning guys looking at only the lathe cost.
Some of us have got sharp enough to store certain items in wish lists and seize the opporunity to buy them when they are on special and free shipping.
The question this raises is marketing. Another sore point with small business. Again if you have the financials set up and have the sales budget established then you have to drive the sales to make them happen. The drive takes place in enticing you to buy. Some of the items move at cost. The key is to be getting attention and moving something. At the end of the day with a big enough mix in product and enough skus you end up with sales that will average out at a certain net gross margin. These sites have metrics relating to sales patterns. We all know its unlikely that the guys seel 1000 Novas this month and nothing else. But it gets the word out. Look how i am using it in this discussion.
If one does promotion frequently in order to drive sales you end up having a certain run rate of sales and cost of sales and profitability. You will then be over break even. The aim hopefully is to make a profit each and everymonth. This certainly was and is my goal.
7) Now to the issue of Mr out of the Blue. Some picked up the difference between wholesale and retail and the quantities. My thoughts here were to get that recognition going. But also to get a certain amount of flexibility going. It is not impossible to have to distributors of your product serving the same market and have them at different prices. I did this in the USA when i first entered the US market. What will determine if this is possible is your product and the demand and perception of value that your entire offering can produce. Price is negotiable always. But its not the exclusive element in a sale. Therefore it can be traded against other factors leaving two customers with the same territory buying similar quantities but at different prices. There are two other parameters to be considered. Delivery, (cost thereof and the timing thereof) and Payment, the method and the delay.
Example, i had a long standing distributor in Spain. He had to factor his inbvoices to pay me in 120 days. On the other hand when i sold to Germany I would have to discount my invoice value by 2% on top of the price which may or may not have been better or worse than the Spanish guy, but i got paid immediately for that. As a general term if a German company is paying yu past 30 days you better be worried about a bad debt.
There are other issues to be considered with Mr out of the blue. One of which is his intentions, origins and threat to your existing customers. Some have mentioned these implications. That is all good. For this reason in a wholesale arrangement one should have agreements drawn up between supplier and buyer. But these are often forgotten in the arrangements small business guys practice because in many cases they get so excited at the fact that they got the order they do not want to put anything in the way that they would percieve might "offend or deter" the customer.
Well not speaking up you will pay for in your pocket. Any agreement of this nature protects both parties. Yu usually cannot contract on a one sided basis. So anyone not willing to enter into an agreement should sound alarm bells for a small business person. If the intent is genuine then the other party should have no problem with a contract. Example I have a 10 page contract for the guy who built my deck. He signed it with no problem. He said it was not neccessary but it spelled out the intent on both sides. His promises and deliverables and my payment schedule and obligations. We were both very happy with the result. I gave him an unsolicited letter of recommendation afterwards and he had already done a few extras for which he was entitled to charge but did not.
I would also urge those who are selling wholesale to consider the more global reach of the market place today. It need not be trully global but just that Mr Blue could have approached you from out of state. Yeah i know i deliberately took the other parameters out of the equation to test flexibility and lateral thinking.
Now to the point of the cabinet guys.
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), consider my counter proposal, and get back in touch with me.
(the nerve of the guy, dictating to me what the price of my product should be, who does he think he is? wal mart? 
