Planning for Profitability and Factoring in Your Compensation

Plan for profit ClairFi Business Solutions

You might be surprised to know that many women who own small-businesses struggle to pay themselves. Sometimes it’s due to a lack of confidence, maybe an overemphasis on a desire to serve, or passion outweighs practicality. Whatever the root cause, it is possible to start making changes today that can increase your personal compensation and your business’ profitability right now.

Four Problems Women-owned Businesses Should Address

If you are making less money working in your business than you would be working for a competitor, it is time to take a closer look at your business. The problem could be one, or even all four, of these issues:

  • Pricing
  • Cost of Services
  • Overhead Costs
  • Planning for Profit

Pricing

When you are pricing your products or services, ask yourself if you are charging enough for the value you are providing. Finding the right price is critical. According to Harvard Business Review, for the average company a 1% increase in volume results in a 3.3% increase in profits while a 1% improvement in price can increase operating profits by over 11%. Finding the right price gives you serious leverage to business success.

There are three components to a good pricing plan:

  • What value are you providing?
  • What are your competitors charging?
  • What is the cost to deliver your service?

All three need to be in line to create sustainable profitability. The first step is to research your competitors and see what prices they are charging for their services. Keep in mind, just because you own a smaller business, does not mean you need to offer deep discounts. There are plenty of benefits to working with a smaller firm that larger firms can’t offer, such as more personalized attention.

The next step is to know your value. When there is pressure to grow or perform, we are often inclined to discount, price below the competition, or otherwise promote through price. However, customers often view price as a proxy for quality. This means discounting can diminish your brand value – the perception of your service – and your profits.

Cost of Services

There are two types of service-related costs that women’s businesses often undercharge for:

  • Contractor costs
  • Time committed to deliver services

With contractor costs, are you taking into consideration that you are the one bringing in the clients? If you had a retail space, you wouldn’t purchase your inventory at retail price and resell it for the same price. Remember, professional services work the same way.  You should be paying “wholesale” to your contractors since they do not have to do their own business development. Consider negotiating better deals with your contractors and reminding them of the value you provide.

When you are calculating costs of your services, be sure to add in your own labor costs — the time you commit to ensure the product or service is delivered. Time is one resource you can never get back. Too often business owners forget to factor in their own compensation. You need to be paid for services you are providing and the risk you are taking in running your own business. The average employee marketing manager makes $76,000 per year while the average freelance marketer makes $69,000 per year.  If you can be making more money working for your competitor, you need to rethink your business plan.

Overhead Costs

Sometimes you need to make an investment to start or grow your business. The problem arises when your overhead cost is consistently higher than 30 to 40 percent of your revenue. Look into opportunities to help reduce overhead costs. Cut wasteful meetings or consider selling or writing off old inventory.

It’s easy to let overhead costs sneak out of control. There is always a new app, professional development program, or office supply that promises to save your business. The key is to set a budget for your business and stick to it. Consider each expense as a trade-off that is only worth it if it will increase your growth or profits.  Yes, expenses can increase your profits if they allow you to spend more time on activities that bring in or serve your clients. However, you don’t want to fall into the “It’s only a few dollars a month” trick. Over time even a ”few dollars” add up and cut into your profits.

Planning for Profit

Your pricing calculator should consider a contribution to overhead costs, owner compensation, and profit. If this is not built in from the start, it will not happen. Make sure to price your services to include fixed, variable, and semi-variable costs.

Creating a financial model to evaluate your current and long-term profitability can help ensure your business is sustainable. While you may need to forego some income to get your business started, you need to know that you have a solid financial structure and you should know at what level you become profitable.  A financial business model takes into account the price you can charge, your costs of service, and overhead costs to determine how many services or products you need to sell to achieve your financial goals.

Making Sure Your Business Is Profitable

At ClariFi Business Solutions, we care about your company’s overall success and are passionate about helping you plan for profitability. We provide a free business health assessment and can help you factor in your compensation while providing the insights you need to grow your business. To learn more, please contact me online or email me at jyaeger@clarifibusiness.com.