Why is my business making the most revenue it’s ever made but our profit is the lowest it’s ever been?
Many small business owners have asked me this question and the honest truth is that you likely have two problems.
Problem number one: Price
You didn't price your services correctly. Your revenue increase is likely due to an increased number of sales and not an increase in the unit price of your service. As a service based business you have to make sure that you are pricing your services correctly. When I calculate price for my clients I make sure that we are covering our essentials.
The cost of labor. This labor cost includes that of the owner themselves and all supporting roles that help that service come to delivery.
The cost of essential materials and supplies that are required for you to deliver your service. If your business is primarily operating online you wanna make sure that you are not only including the software expense but you are including the office supplies, internet, and all of the tech that is required to deliver that service to your client.
Overhead Expenses as a percentage of total revenue. Overhead expenses are basically everything else your business spends money on. That's gonna be your administrative, sales, and all of your miscellaneous expenses that can't be charged directly to a client because they are in essence invisible or back office expenses that wouldn't be reasonable to charge a client for however are required for you as a business owner to operate. Many business owners miss this portion of their pricing and that is why you don't have any cushion.This has to be included in order for you to break even on your services delivered.
Bonus. I also advise all of my business owners to include a markup in their price. I am not personally someone who aligns with the idea that you need to have a 200% markup. I think that's absolutely disgusting, however, I think that based upon your industry standard it’s reasonable if you have a 10-20% markup so that you are meeting the price of the market. You do not want to undercut the market because it's eventually going to come back to bite you in the ass. When you are providing your service at a lower price point than the rest of the market you're often gonna experience burnout because you're taking on too many jobs in order for you to see wealth from your business. You are going to have a decrease in productivity and quality because you are serving more clients than you have the capacity to serve because you aren't making enough per unit.
Problem two: Ballooning expenses
The second reason why you likely are not seeing the amount of net income in your business as you should be is your expenses have ballooned. Every business is looking for a way to run lean, which means that there is not a lot of excess, we're not wasting resources we have just enough in order to deliver our service. As a service based business what this is going to mean is that we want to have just enough supplies and materials to do each job that we need to in a cost-effective manner. We also want to have the level of staff and labor that is going to provide us not only with a cushion to have a work life balance within our business but to also have the expertise for our clients to be happy, refer others, and come back for additional services in the future. Be sure to verify we are seeing a return on the amount that we are spending, our ROI for whatever we are doing so if we are investing additional dollars into advertising for our client acquisition we wanna make sure that we are obtaining the best quality leads. Improve Quality so that the clients that we acquire are staying long enough for us to recoup the cost that we have spent to acquire them and getting additional business from that one lead.
Many businesses as they are growing often will see that their expenses are growing as well, sometimes this is done through redundancy of tech or software. We are purchasing multiple software that do very similar if not the same task and we don't know, because everything is subscription based, what we are paying for. This can also be true of staff, in that we may hire someone at a salary greater than others on the team and they're not as productive as they should be. If they cannot be coached they have to be replaced in order for us not to be wasting our talent dollars unnecessarily. It's important for us to keep an eye on our expenses to make sure that our profit margin is staying within industry standards or within our personal wealth standards so that we generate the wealth that we plan for the future.
If you and your business are confused or you need an expert to take a look because you don't currently have the wraparound accounting services that your black women owned service based business needs we are currently accepting nine additional clients into our bundle services. If you are interested in being one of those nine businesses, schedule your consultation today.
