How do you know that your product or service is priced right? Sure, you can compare prices with your competitors. But are you making money at that price? Knowing whether your business is priced to cover costs and have some leftover seems pretty straightforward, right? Not necessarily.
Many businesses track the funds coming in to know their income. But they often do not have clear and accurate information about expenses to know if they are profitable. One key factor is recognizing all the costs of doing business.
Know Your Operating Costs
Documenting all the costs of doing business should be part of budgeting and pricing your product. If you haven’t documented all your costs yet, this is the time to do it. Fixed costs, such as salaries and rent, are easy to plan for. It’s more of a challenge to figure out variable costs that depend on how busy you are, such as materials and supplies. Be sure to include expenses that aren’t paid every month, such as real estate taxes or property insurance. Don’t forget “invisible” expenses such as bank and merchant services fees.
Funding Capital Investments
Should your pricing consider the cost of capital investments? Will you need to replace equipment in 2, 4, or 5 years? How will you pay for that investment if you do not plan to set aside a portion of your revenue? Rather than borrow to replace equipment or expand over time, your prices could reflect a small contribution toward future capital investment. Something to consider and plan for.
Breakeven Sales Point
So now you’ve documented all your costs of doing business and investing in your equipment and infrastructure. What’s next? Determine the amount of income that covers your cost and generates the profit necessary to stay in business. Is it a competitive price? Is it a price you can justify in your market? Answering these questions with solid financial information about your business will help your business turn a profit.