Stop guessing and price with confidence – Know Your Numbers.
“Revenue Is Vanity, Profit Is Sanity, But Cash Is King”
Knowing your PRICE can be a balancing act.
Every week I have conversations around PRICE and how businesses value themselves and their services or products. Of course, you can be underselling yourself or overvaluing yourself. However, I find that in most cases, it is underselling and not understanding how to analyse and make an informed decision on pricing strategies.
Some have a strategy of ‘cut or discount’ their price, thinking they must undercut their competition or give the best low-price value for customers (not realising that undercutting doesn’t support longevity as a reputable business). For others, they are continually telling me they can’t charge a higher price – but I know their competitors do! More, still don’t understand that the value of the service they give is more than the price they charge. In all cases, they are undercutting their business’s profitability and long-term sustainability. In business, you are not a charity. It would be best to focus on building a reliable and profitable business that pays you and creates profit to reinvest in your business for long-term value.
So, the question I ask you is: Are you buying yourself a job or creating an investment?
Knowing what your figures are telling you.
Your profit and loss statement (P&L) helps you understand your business performance and profitability over time. Its main purpose is to list income and expenditure.
Whereas a balance sheet is a snapshot in time, the P&L shows transactions over a specific timeframe. This can be a month, quarter, financial year, or any other period, and it can be a stand-alone report or a comparative period report.
Do you understand what your “Profit and Loss” is telling you? I find that the businesses I work with don’t understand their numbers partly because their “Chart of accounts” is set up for compliance and taxation and not for “Business Financial Management.”
The Bottom Line
Total income minus total expenses results in the net profit (or loss), is often called ‘the bottom line.’ Often business owners are just interested in looking at the bottom line. Still, a true financial picture requires an understanding of several reports and an ability to see the big picture the reports are illustrating.
The first thing I am doing as a Cashflow Business Coach is discussing the Charts of Accounts to enable business owners to understand what their numbers are telling them. Their Profit and Loss also should support their pricing strategy. This goes back to making good decisions around price and growth, being confident that the price is right to enable profitability. Your “Profit and Loss” tells the story of your price.
Financial Metrics
Here are a few tips to help you understand what your “Profit and Loss” is telling you:
The following tips will help you determine how much it costs to turn on the lights.
- Analyse gross and net profit margins to better understand how successful your organization is at generating a high return.
- Measure cost effectiveness and find the best ways to reduce and manage your costs.
- Revenue Vs. Budget Target: This is a comparison between your actual revenue and your projected revenue. Charting and analysing the discrepancies between these two numbers will help you identify how you are performing.
- Cost Of Goods Sold: By tallying all production costs for the product/service your company is selling, you can get a better idea of both what your product markup should look like and what your actual profit margin is. This is key in determining how to outsell your competition.
- Day Sales Outstanding: Take your accounts receivable and divide them by the number of total credit sales. Take that number and multiply it by the number of days in the timeframe you are examining. Congratulations—you’ve just come up with your DSO number! The lower the number, the better your organization is doing at collecting accounts receivable. Run this formula every month, quarter, or year to see your improvement.
- Expenses Vs. Budget: Compare your actual overhead with your forecasted budget. Understanding where you deviated from your plan can help you create a more effective budget in the future.
“Making more money will not solve your problems if cashflow management is your problem.”
Spending time on Financial Management.
So often, I hear, “I don’t have time!” There is a saying that you should spend at least half a day every week “on your business, not in it.” Allocate one of those half days a week to looking at your facts and figures. The more time you spend looking at them, the more you will understand them. Don’t throw your hands in the air and say it is all gobbledygook. It is your business, and you are working to make a successful and profitable business, so take the time to understand what you are doing.
Spending time knowing your numbers and your financial management (not just your accounting) is part of running a good business. So take time regularly to devote to your numbers – if need be, make an appointment with yourself and your numbers every week and do it.
Are you a charity or building a reliable, sustainable business?
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