Setting Prices – Simple Math

Income EquationWhat does it take to run a business? What expenses do you need to consider in order to be successful setting prices and staying in business?

I was recently asked how I went about setting my prices. Well, that’s really a matter of simple math. Of course everyone’s equation will look different, but it’s a matter of understanding your expenses and what you need to end up with at the end of the day/year.

So, let’s look at what it takes to run a business, a successful business. This can certainly vary from industry to industry, but let’s review some of the basics.

Product or Service – First things first; what are you doing or selling? You have to create, develop, or buy a product or service that you intend to sell for profit. This includes the expenses of materials, manufacturing, engineering, researching and developing time.

Location – You need a location. Even if you’re running a home based business, you need to set-up an office with desk and filing space for organization. Some businesses need to rent retail and/or warehouse space.

Marketing – This is a big category. Marketing includes advertising, newsletters, networking, and article submission. It also includes printed items that promote your business, such as: business cards, brochures, postcards, banners, etc. Marketing includes online media, such as: a Blog, Facebook, Twitter, LinkedIn, YouTube, Foursquare, Pinterest, and Google. While not all of these cost money, they certainly take time; and time is money!

Website – While your website is a huge part of marketing, it also serves as the introduction of your business to many potential customers. The design of your site is an important decision. The hosting and URL purchase can drive your email options. It can also provide an ecommerce aspect.  You will want to integrate any newsletter, social media, and blogging efforts that you engage in to help drive further business to your website, as well as, provide further information from you to your customers.

Bookkeeping – This covers invoicing clients, making sure bills get paid, reviewing aging receivables, reconciling the accounts, and handling any payroll.

Operations – What systems will you have in place to make your job easier? What will the process look like when someone chooses to work with you? What will the follow-up entail? Who will be responsible for each aspect and step in the process?

Administration – The day to day items that take you away from the product or service you are trying to sell. This can include emailing, scheduling, data entry, filing, scanning paperwork, typing and sending letters, etc.

Security – How will you protect your inventory and/or information? Will you need a security system, spyware for your computer, a backup system?

Legal – This covers setting up your business entity, creating contracts, reviewing risk and compliance, and any litigation.

Staffing – Employees are a HUGE expense, including HR, salaries, medical benefits, employment taxes, overhead, equipment, training, interviewing, managing, and professional development.

After looking at this basic list, you can see that running a business is not just about how much time you spend making your widget or providing your service. Each of the categories above can equate to multiple expenses that will eat into your bottom line if you don’t plan for them.

Running a real, sustainable business involves a lot of thought, planning, and expenses. My advice is to consider all the costs, and create a budget before setting up shop and setting prices.

Helpful Hint: As an entrepreneur, 30% – 50% of your time may not be spent on billable activities, so setting your prices based on a 40 hour work week may not be realistic.

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The “B” word…

The “B” word…

BUDGET!

In this computer age, most of us hardly balance our checkbooks when the monthly statement comes in the mail. In fact, many of us don’t even receive a statement in the mail. But that doesn’t mean that we shouldn’t still be aware of our spending, our limits, and our BUDGET!

At least half the people reading this are cringing at the word budget, and may even stop reading this article. It’s a shame really; it’s a shame that such a helpful tool has become such a ‘bad word’.

A budget is not meant to be a financial straight jacket or a cloud of guilt that hangs over your head every time you consider a purchase. A budget is meant to be a guide. A budget is meant to help you achieve goals, whatever those goals may be, and simplify your life. A budget is simply looking at what you spend, and putting aside enough of your income to cover it. And it doesn’t have to be complicated either, below is an example of a very simple budget.

We all have some fixed expenses that you have to consider; housing, utilities, insurance, etc… but after that your budget is all yours to have fun with. It’s never cast in stone and is meant to be a moving target that changes with you and helps you achieve your plans. Most budgets work best with some sort of spreadsheet software or accounting software, this allows for easy adjustments and updating.

The most difficult part of a budget is when you realize that you spend (or need to spend) more money than you make. This means you are going without, overdrawing your account(s), and/or using credit. Some of the simplest ways to correct this are to either increase your income or decrease your expenses. Easier said than done, for some people. For those that are having difficulty with this, a budget and possibly some financial or credit counseling are the best courses of action to take. Both of which can be obtained for little or no cost.

A few quick rules for budgeting;

  1. 40% housing ratio – If possible, your housing expense should not exceed 40% of your income. The less the better!
  2. Revisit often – You should recheck your budget often, monthly if possible, especially in the first year.
  3. Team work – If you have a significant other, you should both be aware of the budget and have input, but one of you should be the ‘finance manager’.
  4. Ask for help – If you are struggling, swallow your pride and get help! Financial counselors have some great information and tools available to help make things easier.

Here is a very simple budget that should at least get you thinking about your own income and expenses, if you haven’t already;

 

Monthly Income

Your Primary Pay $

Spouse’s Pay $

Second job $

Bonuses, Commissions, Tips $

Other Income $

Total Income $

 

Monthly Expenses

Rent or Mortgage payment $

Car Payment $

Household Utilities (Phone, electric, cable, etc.) $

Auto Expenses (gas, tolls, maintenance, etc.) $

Credit Card Payments $

Insurance (home, auto, life, health, etc.) $

Child Care $

Food $

Clothing $

Health (medical, dental, eye, etc./not covered by insurance) $

Entertainment (movies, vacation, videos, etc.) $

Gifts (charities, church, holidays, birthdays, etc.) $

Other Expenses $

Total Expenses $

 

Do you have questions or comments? Can you think of ways that you could utilize a Budget more effectively?

I hope this was helpful and look forward to hearing from you!