Category Archives: Finance

I’ve worked with a number of clients who have considerable years of successful business experience. Their businesses have grown to that stage 2 level- they’re not struggling along attempting to survive a little longer. Year in and year out their accountant puts their financials together and they show a bottom line that sounds like a good number. Yet, when we talk about how and where they make their money, they really don’t have any idea. They don’t know which are their most profitable customers or products. They don’t know which types of jobs fall into their sweet spot and should be the ones they target.

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When your accountant puts your statements together or when you set up QuickBooks, you’re probably just thinking about doing the minimum to get your books in order for the bank or the IRS. You’re likely interested just in figuring out the standard ratios like gross profit margin, operating profit margin, and net profit margin. You have some Costs of Goods Sold categories- direct labor, raw materials, and shop supplies and not much more. All of your other expenses usually end up in an operating expense or general overhead category. Things like interest, depreciation, and other expenses that carry tax consequences may be broken out, but that’s about it. But that’s not enough to know how to price your products.

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In most businesses, payroll is the biggest ongoing expense. How do you factor that cost into your pricing?  Aside from the obvious need to be adept at estimating the time needed to complete the job or build the widget, how do you determine what you charge for that time?

In working with clients, I find that there are several typical problems with the way they calculate their labor expenses:

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I’m sure that you factor labor and materials into your pricing, but what about the tools and facilities required for that labor to convert those raw materials into the product that your customers covet? You’ve made a substantial investment in the equipment and facilities needed to produce your product or service. Shouldn’t you get paid for that investment? Many clients have not included that in their pricing – they inadvertently give it away and then must dig into their own pockets when repairs or replacements are required.

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