How do expenses affect my pricing?
A great bookkeeping system can help you tackle both the revenue and expenses that flow thru your business, but expenses are often the more complicated piece to record and analyze. The easiest way to get a handle on them is to divide them into 3 categories - cost of services, operating, and non-operating.
Cost of services (cost of goods sold)
These expenses are pretty straightforward - they are the costs directly involved in delivering a service. For example, an event planner would include things like renting a venue for a specific event, buying tableware, and paying for catering. Basically, if you can directly link a purchase with a specific service, then it falls under cost of services. These are the expenses we typically consider when trying to decide on pricing because they are fairly easy to quantify.
This category includes expenses that aren’t directly related to a service but are still required to keep your business operating. Examples include the costs of marketing your business, buying computers, paying employees, and insuring your business. Business owners sometimes forget that their pricing should account for these items. If they see that they have more expenses than revenue, they assume they just need to find more clients. However, it is very possible that they may need to adjust the prices they charge to cover for these expenses.
Very few business owners think of the expenses in this category often. Non-operating expenses are those that aren’t directly related to the smooth running of your business. Interest paid on loans, obsolete inventory, and non-cash expenses would fall into this category. These are not exactly the most exciting of all the expenses. Who wants to think about paying for loans and depreciating assets? However, knowing how much these expenses are can help you adjust your pricing strategy and maximize your profits.
You’re probably thinking about all the expenses you have and feeling a bit overwhelmed, but that’s ok. Remember, bookkeeping is about creating a system so you can keep track as you go. The key is to just get started. The system doesn’t have to be perfect because it can adjust with the needs of your business. If you have questions about setting up your system, I would be happy to help! Just fill out this contact form, and we will work through it together.