People start their own businesses for many reasons, but profit is what allows them to stay in business.
Profit translates to freedom – the freedom for you to create, pursue, and realize new visions and goals for the business while also contributing to your quality of life – personally and professionally.
An unprofitable business, on the other hand, shifts a dream into a nightmare rather quickly. The stress and anxiety from not covering the overhead can go beyond challenging; eventually it becomes debilitating. And the business fails. The saddest part is that many business owners don’t realize they’re in that downward spiral until it’s too late.
So, how do you prevent that from happening to you and your business?
It begins by knowing the 4 most common “profit blockers” – how to recognize them, correct them, and prevent them from obstructing your pathway to continuous profit.
Inaccurate Pricing
How did you arrive at the prices for your products or services? Did you track all of the costs involved in producing your products or delivering your services and then add your profit margin to the total? Or, did you just roughly calculate the raw costs and set a price because it “felt right”?.
Unfortunately, too often this is the case. Many entrepreneurs determine their prices based on a gut feeling or only in direct response to competition. This can be a catastrophic mistake.
It’s important to understand that your price has to be based on real data in order for your business to succeed. Your business is not the same as the business across the street, even if it’s a direct competitor – so your prices shouldn’t be either.
Failing to base your price on the specific costs of your business plus your target profit margin can lead to losses that will prohibit your business from thriving, even surviving, over time.
Once you’ve established a profit-based price, you’ll still need to re-evaluate it on a regular basis as your business – and internal costs – grows and changes. Pricing is a major decision. As with all decisions for your business it needs to be based on true financial and market data.
Confusing Gross Income with Net Income
Gross income and net income are related but are very different things. Misunderstanding the difference between them is common; misunderstanding their relevance is dangerous.
Often referred to as revenue, your gross income is the money you bring in – all the dollars that flow into your bank accounts.
Otherwise known as your profit, your net income is the money you bring in, minus all your costs/expenses.
These are important terms to understand as they have a huge impact on the success, growth and profitability of your business. You can be bringing in millions in gross income, but if your expenses are too high you won’t see a dime of net income (profit).
Excessive Expenses
If you create a product, then your COGS (Costs of Goods Sold) will include things like components, ingredients, and packaging; these factors must be included in your pricing calculations. However, it’s important to remember that these are variable expenses because they will vary based upon your sale. The more you produce in a month, the higher these costs will be in that month.
Utilities and insurance are two other – equally critical expenses – that must also be figured into your pricing. These expenses aren’t directly tied to your product or service, but they are still expenses. Your profit also has to cover these expenses because regardless of how well you do from one month to the next, these expenses must be paid every month.
You must assess every expense individually and collectively. If your costs are too high, they’ll absorb all your profits and leave nothing for you. Take the time to review your expenses often and continuously look for ways to cut costs wherever possible. Don’t be afraid to negotiate with suppliers.
Leaving money on the table
Charging clients what your product or service is truly worth is more of a mental hurdle than it is an accounting challenge. If you agree that you wrestle with accurately valuing your product or service, rest assured you’re not alone – most entrepreneurs struggle with this issue.
It’s often a part of what is called “imposter syndrome”. Your brain tells you that you’re not as qualified as your competition, so you can’t internally justify charging what you know to be your real price. So, you give discounts or negotiate. And you bid way too low, far too often.
Negotiations have an absolute place in business, but the type and extent of negotiations depends on the norm in your industry. For many, your price is your price and that's it.
It can be very tempting to underbid clients or projects in order to get the business. But, doing that is a losing strategy. By underbidding, you’ll never know what the client would have been willing to pay.
This is not to say that you should always overcharge your customers to see if you can “get away with it”.
You need to take a measured approach to pricing and quoting by taking your true costs plus profit into account and balancing that against what the general market bears while also being confident in your worth and value.
Bottom line:
Profit is king. It’s what makes or breaks your business – today, tomorrow and in years to come.
Knowing your true financial situation – being fully aware of all business financials – is the most surefire way to stay in business, grow your business, and achieve the best quality of life.
It starts with keeping accurate books and reviewing them regularly. This is the only way you’ll be able to identify which of the “profit-blockers” are impeding your ability to hit your goals. When they are spotted early enough, they can be corrected and prevented before they become problems that won’t go away.
On a positive note, regular review of your expenses can help you recognize trends and patterns that you can leverage to your future advantage.
Proper pricing is rooted in actual expenses – when these two elements are calculated and strategically applied, profit is a foregone conclusion. If you realize you lack the time and ability to properly maintain your books, you may want to consider reaching out to Still Waters Bookkeeping.
In most cases, Still Waters Bookkeeping services are not an expense – they’re an investment, with higher profitability as the return.