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Monday, December 11, 2017    

Improving the Health of Your Business With Cost-Cutting & Operational Efficiency

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Lisa GoodaleLisa J. Goodale is a consultant and supply chain geek living in Frisco, TX. Ms. Goodale graduated from the nation's sixth best operations schools. She contributes articles, blogs, web content and has offered her services to many. Check out testimonials .
Brain Waves Archives
November 2009  (3)
September 2010  (2)

Pricing for Profits

So, you're not getting the profits you want.  Do this test to find out why.

 

 We know this:  direct costs + overhead factor + profit margin is the formula for pricing the product / service.  Depending on the product's life cycle, we adjust the profit margin.  The question here is how do you test to make sure that you haven't erronously started to eat your profits?

 

Over the years, I have come across clients who don't fully understand income statements, balance sheets, and other reports.  It's no big deal.  We have to learn some time.  As I begin to talk to an owner's staff, I learn that yes, the bookkeepers, often don't debit and credit the appropriate accounts.  One of the recurring discovers are loans. 

 

If you know that one item is supposed to be in indirect (aka overhead) costs and another is supposed to be considered direct costs (Aka COGS), what just happened to the pricing model for your product / service?  The direct costs are OVERSTATED and the formula for overhead absorption factor is incorrect.  Therefore the profit margin moved, and probably not in your favor.

 

Your Business is Alive! provides  the litmus test for quality checking your pricing model:  go to THE LAB and follow the instructions.  Very likely, if you're on this website, the answer wasn't music to your years.  Below is one of the frequent finds to getting this corrected.

 Are you accounting for your business loans properly?

Income statements are also referred to as profit and loss statements. They are correlated to the balance sheet in the sense that they stem from the chart of the accounts. My Business is Alive! staff frequently stumbles upon the "frequent small businessperson's mistake" -- the interest as well as the principle payments are either 100% in the long term liability account or 100% in the interest paid account. Only the interest from the loans is considered the expense. Therefore, it is the interest that is reflected on the income statement. An easy way to remember this is "I write off the interest on my house but not the principle. Therefore, the business works the same way."

The principle payment goes under DIRECT cost if you can answer this:  this vehicle (asset) would not be purchased if I didn't have at least one customer.  For example, an electrician service company owner asked, "Is my company van a write-off?"  If the van is used to make the house calls, then "yes."  If the van is used to take pack you and your family up and head for Disney, "no."   One thing is for sure, the IRS follows up on everyone.  It's important for your bookkeeper to get the right costs in the right accounts not just for the IRS but also for your pricing model.

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