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December 8, 2016

When it’s Time to Raise Rates

When it's Time to Raise Rates
How did 2016 go for you? Did you bring in the revenue you expected, or did you fall short of your goal? It’s easy to blame a slow year on why you didn’t make your income goal, but the culprit could be your pricing structure.

Maybe you were busy, but just ran out of time in the day because of family obligations or big client projects. Again, your pricing structure may have caused you to have to work more hours than you wanted (because you weren’t charging enough).

Raising prices is a little unnerving, especially when some of your clients may not be able to afford your new prices. But you’re doing them (and yourself) a disservice by having to work more hours that you want to, just to pay the bills. Here are some of the top reasons to raise your prices in 2017.

When you have a waiting list.

People are waiting to work with you and putting down deposits even though their start date is two months off. This is an enviable position to be in, to know that you have client work two months from now. But it could also be a clue that people can’t wait to work with you because of the great quality that they receive from you, or the fact that your prices are so low that they want in on the steal.

Raising your prices will help to weed out some of these potential clients so you don’t feel so overwhelmed with your work load. It will also allow you to cut back on your hours while providing even better service to the clients you work with.

When you’re working too many hours, just to make ends meet.

There’s nothing worse than working for peanuts, and having to work more hours than you want just to keep the doors to your business open. You’re constantly tired and even grow to resent your clients because you don’t feel like you’re compensated fairly.

Raising your prices will ensure that you’re making what you need to make, while only working the hours that you need to. You can make the same amount working 60 hours a week at $40 an hour as you can working 40 hours a week at $60 an hour.

When you’re not working with your ideal client.

In my experience, the clients who are the most difficult to please are those who want to pay the least for services. When you raise your prices, you start to weed out the clients who just want your service at the least expensive price point possible. And you start to attract clients who value you for the quality service you provide and are happy to pay for it.

When you’re undercharging, compared to competitors.

If your pricing is far below your competition’s prices, you’re doing two things: undervaluing your abilities and setting yourself up to look like a fly-by-night one-off service provider. Sure, your clients want value. But they also want quality. When your prices are very low, you look cheap. And no one wants to look cheap.

Raising your prices sets you up as a professional in your industry and raises your value in the eyes of your ideal clients.

If you’ve never raised your prices before, what’s stopping you from taking the leap? With so many reasons a price increase is beneficial, the first of the year just might be the perfect time!

Filed Under: Business Management Tagged With: money management, overhead, pricing

June 3, 2016

Glossary Glance: Profit Margin and Overhead

Glossary Glance: Profit Margin and OverheadIt’s an occupational hazard. I meet with a client or connect with them over the phone to talk about their business finances, and as I’m delving into their numbers, terms just fly out of my mouth.

Accrual. P and L. Trial balance. General Ledger.

Bookkeepers like me feel like I’m speaking in plain English, but I soon realize by my client’s silence or dead stare that they’re trying to keep up, save face and avoid embarrassment by asking what I mean.  I understand, and I hope this “Glossary Glance” series saves you the awkwardness of stopping me to ask what on earth I’m saying. 

So, let’s start by tackling these terms, two by two. It’s easier to digest, and frankly it’s really important for you to really comprehend because after all, it’s your business. Even though you’ve hired a professional to tend to your books, you still need to know enough to ask good questions and follow what’s going on. After all, you shouldn’t be a spectator when it comes to the management of your business’ finances.

To double down on this point, I encourage anyone who has heard a term or concept that they just can’t get a handle on, to let me know, and we will add it to this blog series. Don’t be shy – the only dumb question is the one you don’t ask! 

Profit Margin

I think it’s safe to say we know that profit refers to the money a business makes after it has paid its expenses or money going out (more specifically called net profit). Profit margin gives this term a little more perspective and breadth. It is usually expressed as a percentage, and generally the higher the percentage, the happier you are as a business owner. In the examples to follow, we’re calculating gross profit margin, or just the cost of a product versus the income received for its sale.

Let’s say you make customizable T-shirts. You charge $10 each for quantities up to 11, and $9 for orders by the dozen.  That’s your income portion of this equation.

(Math alert!! Please stay with me. It’s not too tough from here.)

Your T-shirt supplier (you after all just design and place the ink on the shirts) charges $4 per shirt, and $2.50 for quantities above a dozen.

Customer A purchases 10 shirts. You get $100. You pay your supplier $40, which leaves you $60. Obviously there may be other costs to produce the shirts, but for simplicity’s sake, we’ll leave it at that.

Your profit margin is 60 percent, or $60 kept out of every $100 in purchases.

Customer B orders 100 shirts, pays you $900, and you in turn pay your supplier $250. That’s a profit of $650, and a profit margin of slightly more than 72 percent.

Overall, it’s a simple concept, but we’ve also left out of this equation other costs that can erode your profit margin. In these examples the cost of labor to create, process and package these shirts, which is included in operating profit margin, hasn’t been figured in. Unfortunately there’s no volume discount on wages, and if the production of 100 shirts means additional employees throughout the process, it may not be as sweet of a deal.

We also haven’t calculated other taxes, interest on business loans and other obligations, all of which are a part of net profit margin.

What a great bookkeeper will do is organize ALL of your expenses to compare against your income in order to determine your profit margins for products as well as services (with your time weighed against the income in these cases). A fantastic bookkeeper will then also help point out where costs could be improved or curtailed to raise your profit margin.

Overhead

If you want to think in literal terms, this refers to a business’ cost just to be open – and in a bricks and mortar sense – ‘what’s over your head.’ The rent, electricity, property taxes, etc. that are a part of the standard business model is part of overhead costs. None of these costs directly serve to put a product on the shelf, or a marketing campaign in your client’s hands, but are all too real to ignore.

But what if it’s just you and your laptop, a smart phone and your usual corner table at the local coffee shop?

Overhead still applies, especially if you could get evicted if you don’t buy a $7 latte every day. For solopreneurs like you, there are still costs like business insurance, fees paid to hire professionals like attorneys and (ahem) bookkeepers, advertising costs, merchant processing fees, or any licensing or government fees to run your business.

Of course you need a great bookkeeper, and ironically it’s to help identify what your overhead costs are and track them. As you’re going about the business of your business, then, a bookkeeper is likely looking at these expenses to see where there can be efficiencies, saving you money and perhaps helping you work smarter. And speaking of you working smarter, if you were the person working late into the night trying to balance your books, outsourcing a bookkeeper also takes that time expense off of your plate.

A good pairing

It really wasn’t random to put profit margin and overhead together, by the way. As I mentioned earlier, it can be easy to focus on formula when considering your profits. Profit margins should include the cost of overhead (operating or net profit margins) for the best snapshot of how well your business is operating.

OK, that’s enough for today. Suffice it to say that to get to a better profit margin, much of the focus can be directed at the overhead, reducing or eliminating costs that only indirectly help you make money.  An experienced bookkeeper whose focus is tracking your expenses can keep overhead low, while keeping your profit margins up.

Filed Under: Glossary Glance Tagged With: how-to, overhead, profit margin

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