Pricing for Profit — Money Matters Weekly #26
Budgeting is a cornerstone of managing money and personal finance. Your personal expenses are divided from your disposable (after tax) income into Needs (Must have ) — 50%, (Your needs can be broken down into — Education 20%, Housing 15%, Clothes 5%, Food 10%), Wants (desires) — 30% and Savings — 20%. Watch this video. If as a Small Business Owner you over-spend on any of these line items you may be doing so at the expense of your business.
At the back of your mind one should ask where is this disposable income coming from? . If you are a Small Business Owner you must pay yourself. This is part of the Direct costs of production of goods and services. Indirect costs of production include costs peripheral to production like security, transport, IT support etc. The rule of thumb is the following formula:
Sales price = Direct costs + Indirect costs + Profit. In order to make sure you are in profit making territory, this formula should read:
Profit = Sales price — (Direct + Indirect costs) What is written first gets done first
Every sale must be banked in a Revenue (Topline) Account which feeds into Profit, Owners compensation, Tax and Operating expenses accounts. That makes a total of 5 accounts which are akin to putting your household expenses in envelopes as in the video above.
Being profitable is a great way to ensure that you will be in business for a long time. Why not invest time and money in order to pivot in this season and become more profitable.
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About Melvin
I am a Coach, Mentor and Trainer — visit my profile. I am passionate about making small businesses thrive in the marketplace by enabling business owners develop a healthier relationship with money.
Wishing you a great week ahead. I leave you with a quote: “The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” — Katharine Paine
