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As an accountant you might expect me to say that YES, the numbers should drive the pricing question, but I think that for a small business operating in a competitive marketplace and a recession there is a more common sense approach to pricing that is a mixture of marketing and finance.

As you might expect most customers will decide whether to purchase based on whether they perceive they will receive value for money from a purchase. Therefore for products and services that are similar to other competitors there will be a market (or target) price that you might think you have to price your products at.

If this is the case then you have two answer two questions. (A) How do I ensure that I make money by selling at this price? and (B) How can I add extra value to my services or products that mean I can raise my prices?

To answer the first question you must be able to break down your product into individual costs incurred in delivering that product so that you can calculate your gross profit margin and compare it to other products.

For example if a wedding package is priced at £1,500 and the individual costs total £700 the gross profit it £800 and the margin 53% (£800/£1,500).

You might find that the margin does not match that of other products and you might want to look at the individual costs to identify any that could be cut or scaled down. This approach to pricing is known as value engineering and assumes that the price is fixed by the market.

You might decide to answer the second question after making sure that your product is profitable by answering the first. To start to understand value I talk to my clients about their competition and ask them to review ten of their competitors to understand what they are offering.

By identifying features of your competitors products on a "competitors features grid" (available to clients in the client area>templates section) you can then compare their similarly priced products to your own. This then allows you to add features to your own products that "add value" and consequently mean you can charge a premium for.

At the same time you should be considering your marketing so that you clearly identify these "value added" features in on your website, adverts and other promotional items to demonstrate the uniqueness of your product.

So to conclude the pricing question is both an art and a science. Get the science right and the art can be the cream on top!
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For the professional photographer though there are some good tax savings to be had from offsetting your equipment purchases against your taxable profits.

So that everybody is treated the same when it comes to offsetting capital items against profits our friends at HMRC developed a scheme called the capital allowance system that effectively standardised the allowances that can be claimed on an annual basis on the value of plant and equipment (not cars!) used within a business.

Last year this scheme was updated with the introduction of the Annual Investment Allowance. This allowance enables you to offset 100% of plant and equipment purchases in the year of purchase, up to a value of £50,000, against your profits.

So if you purchase the latest professional camera body and set of lenses for say £10,000 and you make profits of £40,000, for tax purposes profits are reduced to £30,000.

So if you are a basic rate tax payer you save income tax of £2,000 and as a higher rate tax payer, income tax of £4,000. So remember to carefully consider the tax allowances available when making those equipment purchases and have your defence ready when people ask you whether you need that new gadget!
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As a VAT registered business (a business with turnover of over £68,000 on a rolling 12 month basis) essentially you collect tax on behalf of the Treasury on the value you add to your products. So for example if you produce widgets and they cost you £100 plus VAT you fill them with gas at a cost of £30 plus VAT and then sell them for £200 plus VAT you will pay £10.50 of VAT to the Treasury, the £30 collected on the sale less the £19.50 paid on purchasing the widgets and the gas.

Registering for VAT does not cause businesses who sell to other VAT registered businesses too many issues other than the calculation of what VAT is payable. For photographers though who sell to consumers there is a pricing issue to consider.

When you register for VAT you have to apply the VAT rate, currently 15%, to the net price of your goods. So if a wedding package is priced at £2,000 VAT of £300 should be charged on top resulting in a final price to the consumer of £2,300. If this price takes you outside of the market price in your area you might have to suffer the VAT and hold your price at £2,000.

If this was the case then £2,000 would become the gross price and £1,739 the Net price. You would be able to reduce the Net price of your costs by reclaiming the VAT incurred on purchases, and so if the costs were £750 including VAT these costs would be reduced to £652.

So pre VAT registration the profit made on the sale would be £2,000 less costs of £750 a profit of £1,250. Post VAT registration the profit would be £1,086, £1,739 less costs of £652.

This reduction in profit over say 35 weddings could cut profits by £5,740 a fall in profits of 13.12%.

For any business approaching the VAT threshold planning for the impact of VAT registration is therefore vital and should form an important part of the their financial plan and strategy.
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I always like to build sales forecasts from units upwards. First you should try to think, for each type of income you have, how many units you think you will sell over the next twelve months. There is always some element of guesswork here but you can use your previous experience as a guide.

The next stage is to look at your pricing structure and add an average price for each type of service. This will then provide you with your income forecast. If you take deposits you may need tweak the forecast to account for these.

The next stage is then to look at the how much it costs on average per unit of sale. To do this you should identify all of the direct costs that are incurred for a particular type of service.

You can then calculate your gross profit percentage for that type of sale.

For example if your average price for a wedding was £3,000 and all of the direct costs that are incurred total £1,275, the gross profit percentage (or margin) is calculated by subtracting the costs from the price. You arrive at a profit of £1,725 and, by dividing this by the price of £3,000, this would give a gross profit percentage of 57.5%.

Once you know this you can then apply it to your cash inflows to forecast, on average, your direct costs of sale.

By applying some formulas to the spreadsheet you should then be able to calculate your overall cash flows for the year by subtracting your personal cash requirements, and annual business costs, from income after payment of direct costs.

As you can see the second half of the forecasting process is a lot less objective in that it is largely based on an estimate of sales units. Of course, if you know your sales up front for the year, you can forecast these into your cash flow model.]]> http://www.financeforphotographers.co.uk/blog/index.php?entry=entry090125-170000
As cash is a businesses most important asset it is vital to understand where the cash in, and out, flows will be. It is for this reason that one of the most important planning tools for any business owner is a cash flow forecast.

The process of putting a cash flow forecast together doesn’t have to be difficult or complicated as I recently demonstrated at the SWPP business school. Over the next two posts I aim to provide some practical advice as to how you can put together a forecast for your business.

You should start by looking at the personal expenditure you need to cover each month, and the extra cash that you personally want to draw from the business. At the end of the day you have chosen self employment as opposed to employment and you should be compensated for the time and effort you put into your business.

The next stage should be to look at the businesses costs. I like to start with a blank piece of paper and review the costs of the business from scratch. This is a good time to review whether a certain expense is necessary or not.

You should try to enter the costs in the month that they will be incurred.

Once annual costs have been forecast you should then turn your attention to your equipment. There is always another piece of kit from our favourite manufacturer to tempt us or an item in our camera bags that needs to be replaced.

You should identify at the start of the year the items that you need to replace and how much this will cost. You should then look to enter the costs into the correct month on your forecast,

Next time I will take a look at how you complete the forecast by adding cash inflows and income. ]]> http://www.financeforphotographers.co.uk/blog/index.php?entry=entry090123-090000
I sat there and wondered how I, the accountant from Lincolnshire, could whip the audience up into a frenzy as Doug had!

I started my presentation, it seemed, with a lot of doom and gloom. I had asked some of my professional contacts for their 2009 outlook and had not been too surprised when they talked about cash management, reductions in consumer confidence and spending, increasing disputes between partners and directors, a lack of general confidence and a reduction of support from banks in terms of lending due to the credit shortage.

The main part of my presentation took at look at two important areas of finance; incorporation and whether it’s best to trade as a sole trader or limited company and cash flow forecasting.

It was clear from the many questions after the session that the discussion around incorporation had sparked the interest of many of the people in the audience. It is going to be an area that I follow up next week on this blog with a commentary about the difference from a financial perspective... so check back soon!

The next area that I looked at was cash flow forecasting. I decided that it would be a good idea to show how easy it was to prepare a cash flow forecast by trying to do one live.

Again the questions after the presentation have led me to think that this important area is one that I should devote some time to on this blog.

The audience was great and I very much enjoyed my trip to the SWPP Conference, my only regret was that it couldn’t be longer but as most accountants will now have across the UK I have to turn my attention to tax returns!
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I have been preparing this for a couple of months and, as I put the final touches to the slides, I can't help but think that an understanding of cash is going to be vital this year for all businesses.

A lack of cash is the number one reason that businesses fail and I remember a quote from a colleague who said "that a sale is not a sale until it is invoiced and a profit is not a profit until the cash is in the bank."

Shortening the period from invoice to the time that cash is paid into the bank should be a priority for all business owners in 2009 as cash becomes an even more important commodity.

The main content of my SWPP Business School session will centre around cash and the management of this most important asset and I am sure that this topic will continue to surface on this blog over the next week!]]> http://www.financeforphotographers.co.uk/blog/index.php?entry=entry090108-200000
But then as quickly as the New Year festivities had approached they passed and we woke in 2009 to the same woes and economic uncertainty that we thought we had left behind. It would seem though, that the only certainty for 2009 is that it’s going to be a tough year.

So as we enter 2009 what actions should we be taking to prepare our businesses and ourselves for the year ahead?

1. Write a business plan

One of the most important actions should be to take time out to review your business and write a business plan for the year ahead. 2009 will not be a time for economic gambling and the business plan should ensure that the basics of your business are reviewed and that risks are identified and provisions to manage them are developed.

The plan should also spell out a number of scenarios that address the “what ifs” so that you are as fully prepared as possible for all that 2009 offers.

2. Forecast cash flow

Another important action should be to either update or create a cash flow forecast for the year ahead. Cash is the number one reason for business failure and therefore understanding the cash flows, both in and out, and their impact on the business is vital for survival.

A cash flow forecast should only be prepared for up to 12 months as it is almost impossible, under the current economic conditions, to predict with any degree of certainty the cash flows more than a year ahead. The latter months of the forecast will be less accurate for this reason but it will act as an estimate of the cash flows.

In addition to an annualised forecast it is also a good idea to prepare a cash flow forecast on a much shorter basis that actually forecasts cash payments and receipts. This is good from a planning perspective but also provides a schedule to work to.

Once the forecast has been finalised it should then be possible to identify key indicators of performance that you can track and monitor as 2009 progresses.

Of these indicators gross profit and breakeven are two of the most important business health indicators for a business owner to understand.

3. Prepare up to date accounts

Whilst it is important to look to the future it is also important that you know where you are right now. Therefore, bringing book keeping records up to date, and preparing management accounts that can be compared to the future forecast, are vital tasks for the dark cold January nights.

Regular monthly management information can be an early warning system to a businesses health and should therefore be a priority on the January task list.

It is also important to ensure that the financial system is capable of making information available to enable you to review key performance indicators alongside the accounts and forecasts.

4. Review tax payments

Tax payments; Income and Corporation tax, PAYE and VAT can cause significant cash flow spikes that can seriously deplete cash reserves. The cash flow forecast will highlight the timing of these spikes, allowing you the time to talk to HMRC to discuss the possibility of spreading the payment of liabilities.

It may also be possible to reduce income tax, first payments on account for the year to 5 April 2009 if current management accounts show reduced profits and you don’t expect future changes in performance.

2009 doesn’t have to be a year of doom and gloom. Whilst it is likely to be a very tough year for most businesses and their owners early planning to identify risks, cash flows spikes, deficiencies and problems will allow sufficient time to action remedies.]]> http://www.financeforphotographers.co.uk/blog/index.php?entry=entry090108-190000 Nicholsons Chartered Accountants & Business Advisers in lincoln.

The aim of the website is to bring the world of finance closer to those working in the photographic industry. ]]>