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If you increase the retail price of your product too much above the competition,
you might lose units of sales to the competition and not yield a high enough gross
profit to cover your expenses. However, if you decrease the retail price of your
product too much below the competition, you might gain additional units of sales but

not make enough gross profit per unit sold to cover your expenses.
While this may sound obvious, a carefully thought out pricing strategy
maximizes gross profit to cover expenses and yield a positive net income. At a very
basic level, this means that prices are set at a level where marginal and operating
costs are covered. Beyond this, pricing should carefully be set to reflect the image
you want portrayed and, if desired, promote repeat business.
Operating Expenses
The operating expense section of the income/P&L statement is a measurement
of all the operating expenses of the business. There are two types of expenses, fixed
and variable. Fixed expenses are those expenses that do not vary with the level of
sales; thus, you will have to cover these expenses even if your sales are less than the
expenses. The entrepreneur has little control over these expenses once they are set.
Some examples of fixed expenses are rent (contractual agreement), interest expense
(note agreement), an accounting or law firm retainer for legal services of X amount
per month for 12 months, and monthly charges for electricity, phone, and Internet
connections.
Variable expenses are those expenses that vary with the level of sales.
Examples of variable expenses include bonuses, employee wages (hours per week
worked), travel and entertainment expenses, and purchases of supplies. (Note:
categorization of these may differ from business to business.) Expense control is an
area where the entrepreneur can maximize net income by holding expenses to a
minimum.
Net Income
The net income portion of the income/P&L statement is the bottom line. This is
the measure of a firm’s ability to operate at a profit. Many factors affect the outcome
of the bottom line. Level of sales, pricing strategy, inventory control, accounts
receivable control, ordering procedures, marketing of the business and product,
expense control, customer service, and productivity of employees are just a few of
these factors. The net income should be enough to allow growth in the business
through reinvestment of profits and to give the owner a reasonable return on
investment.
The Cash Flow Statement
The cash flow statement is the detail of cash received and cash expended for
each month of the year. A projected cash flow statement helps managers determine
whether the company has positive cash flow. Cash flow is probably the most
immediate indicator of an impending problem, since negative cash flow will bankrupt
the company if it continues for a long enough period. If company’s projections show
a negative cash flow, managers might need to revisit the business plan and solve this
problem.
You may have heard the joke: “How can I be broke if I still have checks in my
check book (or if I still have a debit/credit card, etc.)?” While perhaps poor humor,

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