Welcome. In today’s episode of business success with Doug Barra, I am going to give you one of the keys to making sure that your business is successful.
This is understanding your finances and making sure that you know how to keep your business afloat.
So if you’d like to understand business finances in a way that will help you make sure that you get the most out of your business, this is the video for you!
On today’s video I am going to explain what it is that you really truly need to know about finances for your business. What are those things that make such a freakin difference that it could actually have you be completely underwater if you don’t understand them?
Well, one of those things that’s most important is that you understand the way you do your pricing. Because, so often I talk to business owners that just don’t understand their finances. They don’t understand how they have to make sure that they are making more from what they sell than what it cost them.
Now this may seem crazy to you! You might be going, “Of course I know that I must make more than what I’m paying for it. That just doesn’t make sense.”
But the truth of the matter is that very often business owners don’t understand properly how to calculate those figures and how to be able to actually know that their business is being profitable, all the time.
One of the things you have to do is, you have to know all of your products and services! Every single one of them! How is that working for me? How am I making money off of this product and what are all the costs associated with this product?
Now, OK, I know I said all the costs associated with the product and you may be thinking “well, every moment of time in my business is a cost”.
We have to look at those costs that are truly associated with it. And so, when I say a cost associated with the product, or service, or selling the product, or service, it’s something that, if you didn’t sell that product or service, then you wouldn’t be paying that cost. But, if you did sell it, then you would be paying it. All right?
So think about it like this: The easiest way, of course, is, if you sell a product and you have to purchase that product, before you sell it, like you’re buying wholesale and selling it retail, then, of course, the cost of that product is a cost of goods for you. That’s a cost of the sale.
However, what often people don’t think about there is, if you’re going to sell using credit cards, or you have a ACH set up with your bank, or something like that, the cost of that ACH, or processing through that credit card is actually a cost of doing business for you. You only pay that if you make a sale.
Also, if you have a salesperson, then that salesperson is going to be a cost of goods if they’re getting a commission. The commission for that sale is a cost of goods.
Now, this is not what your accountant is going to tell you. Because your accountant is going to tell you that the cost of goods are only the cost of the product themselves, and if you’re a consulting firm, or you have professional services, or personal services, your accountant will usually tell you “you don’t have costs of goods”. That’s not exactly true.
Anything for us, as an entrepreneur you have to understand, that anything you would pay, only if you make a sale, is a cost of goods, and especially if its related to the actual price. But, in any case, its a cost of goods if you have to pay it in order to sell that product.
I’ll give you a good example of why this sometimes gets in the way for people. Think about this for a moment. Let’s say that you’re a professional services person and you have a couple of people that work with you. So you are actually going out and getting people to come and purchase services from you and then you’re paying someone to provide those services. For that your accountant is going to say that the payroll for that person to do that service is not a cost of goods.
Now, I look at it this way if I’m going to pay that person, no matter what, then they’re not a cost of goods.
But, if I’m only going to pay that person, or I’m going to pay them a commission, based on that service, then they are a cost of goods and I need to actually think of them that way – as a cost of goods.
And, I have to take into account that cost when I’m talking about how much to charge for those services or, how much I can actually discount those services.
Because, if I’m going to do discounting – I don’t recommend it. Okay just so you know I don’t recommend discounting. That’s one of the ways we get into trouble – but, if you were going to, you have to understand all the costs.
Because, let’s say that I’m selling someone’s services right and I’m marking them up and I’m marking up their services by 20 percent. So, whatever they’re charging I’m going to add 20 percent to that. If we do the numbers here then let’s say they are charging 100 dollars, then I’m going to add 20 percent, that’s 20 dollars. So I am going to make it 120 dollars to sell their services, right?
Now, if somebody comes to me and says something like, “I think you should discount your services for customers that are a certain kind of customer – let’s say for mothers, I don’t know. So I’m going to discount services for mothers. OK.
And then you say well how much should I discount those services. Well I’m marking them up by 20 percent. So let’s discount them by 15 percent. At least I’m still making five percent.
OK, well, let’s think about that for a second. So 15 percent of a hundred and twenty dollars is what. OK so 10 percent would be 15 dollars. Another 5 percent would be seven and a half dollars. So now I am taking off wait a minute…
Let me think about that again. OK so it’s hundred and twenty twenty dollars. So I’m taking off 10 percent that’s 12 dollars and then 5 percent, that’s six dollars, so that’s 18 dollars.
I’m taking off eighteen dollars, but I only marked it up 20 dollars. Now I will be making two dollars. That didn’t quite work out the way I thought it should. That’s not a 5 percent increase, that would be five dollars!
The reason is because we’re using two different numbers that don’t quite work well together.
All right. You can’t do a discount based on my markup. I have to do my discount based on my margin and margin is different. Margin is, what percentage of what I’m selling it for am I keeping.
And, twenty dollars out of 120 is NOT 20 percent, therefore the problem exists.
All right. So thank you for listening.
Please make sure that you understand how to do your finances properly so that you can be successful.
This is Doug Barra – your business success is my business.