In How to Price a Job to Make Money, we focused in on the basics of how to price jobs so you, the business owner, can earn a living. Today, we're going to dig into how to use pricing so your business is profitable.
It's a fantastic feeling when you find a sweet spot as a small service business where you're getting jobs done, getting paid, and earning a living. But there's another step necessary to ensure your business is earning a profit. Every business has bills, and experienced business owners know it's important to keep business and personal expenses separate (we'll have more on that in a future post). Your business needs to be paying its way, not relying on you to keep it afloat.
How do we get a small service business to the point of making a profit? Let's dig in.
Know your costs
What kinds of costs might your service business have? Maybe your business needs to be bonded, licensed, and insured. Maybe you have to cover workers' compensation in your state. Maybe there are some software tools (like WorkWeek) you use to help you build, run, and grow your business. Whatever they are, your business must be able to pay for these costs.
Just as we talked about in our last post about knowing your costs to determine prices so you earn a living, knowing your costs is the most important step of pricing your services so your business earns a profit, instead of going in the hole.
If you don't know how much it costs to run your business each month, you need to stop and figure that out right now. You'll never make a profit if you don't.
Here's some questions you should be able to answer:
- How much do I spend on non-job-related supplies each month?
- How much do I spend on software/tools to build, run, and grow my business?
- How much does my business insurance cost me per month?
- How much does workers' comp cost me per month?
- How much am I spending each month on consumables like gas?
- How much do I spend (or would I like to spend) on things like business cards, flyers, and marketing to grow my business?
We could go on, but we hope you get the idea here. Whatever your specific services are, there are things required each month to keep your business running. Your goal as a business owner is to know what these things are, and how much they cost on a monthly basis. Even if some things (like insurance) aren't paid monthly, you should break total costs down into a per-month figure so you can more easily focus on pricing your services so the business is putting money in the bank to cover all the costs.
You should be able to put actual numbers on each of the costs required to keep your business running each month. Don't stop until you know all the costs.
Count the costs
Let's keep things simple here to illustrate some common expenses and get a total of our monthly costs to run our service business. That will bring our estimated monthly costs to run the business to look something like this:
- Insurance & workers' comp: $150/mo
- Software/tools: $100/mo
- Business cards & marketing: $100/mo
Now, we've already learned we need to price our labor, owner income, and supplies/materials into each job to avoid losing money on a per-job basis. So we're left with just the business costs that exist outside each job--insurance, workers comp, software, tools, marketing, etc. For our example here, that totals $350/mo. That means to keep our business making $0 in profit per month, just staying afloat, we must add enough extra to our per-job pricing to make that $350/mo to keep the lights on.
If you aren't factoring business expenses into your job prices, your business is never going to have enough cash to pay its bills. Guess who's going to have to pay those bills when they come due if your business doesn't have the funds?
You know what's going to wind up happening as a result? You're going to be up late at night wondering why you're doing job after job, and not seeing any money being made. You're going to find yourself using the money you pay yourself—you know, the cash you need to live, to eat, to see a movie—just to keep the business afloat. Worse yet, you might find yourself relying on credit cards to keep things going, and you'll rack up a ton of debt.
This is a recipe for disaster.
There's a simple way to make sure your business pays for itself, and save yourself from paying for it out of your pocket. Make sure your business earns money on every job, too.
Paying your business must be priced into every job
Your business will never earn a profit if you don't price it into your jobs. It's not magic, and you can waste a lot of time never making a dime if you don't learn how to price your services correctly so you earn a living and your business earns a profit.
Don't wait until you're in the hole to learn how to correctly price jobs to earn a profit. Start today.
The simplest version of pricing jobs so your business earns money looks like this:
- Calculate the total costs of running the business each month (like we did above, ignoring the per-job costs, which should be part of the job price already).
- Divide the total monthly costs by your average number of jobs each month. Add that amount to every job you do.
Scenario 1: Let's say we do 10 jobs each month. We have $350 in costs each month to run our business. So, we only need to add an extra $35 to each job, and we'll know the business has the cash it needs to pay its bills.
Scenario 2: If we're really busy, and we're doing jobs every day, that per-job number lowers. If we're completing 20 jobs per month, we only need to add $17.50 to each job to cover the business expenses.
Now, that's still running your business at cost, and we're focused here on learning how to make a profit, however small it may be. This is always wise to make sure you're never taken by surprise when the slow times come, or an unexpected expense comes up. As you run and grow your business over time, you'll start to notice things like that, and you might find it's worth adding some extra padding to your prices to make sure the business is taken care of. That's the profit.
Scenario 3: We're completing 20 jobs per month. That's basically 1 job each working day. We know we need to add $17.50 to each job's cost to keep the business bills paid. So, to make a profit, we stay at the $35 we originally added to each of our jobs. Just like that, we're going to not only make sure we cover the $350 in monthly business expenses, but we're also going to make $350 in profit!
A smart service business owner will keep their profits in the bank, separate from their personal funds. If you're making double your costs each month, that means you'll be guaranteed to have the money to pay expenses even if the jobs slow down for a few months in your slow season.
Growth brings more profit
As we keep getting more jobs, and we keep growing, we're always going to have to take another look at our pricing and our expenses to ensure we're staying profitable. If you learn how to keep your costs in mind as you price each job, you'll find that earning a profit becomes natural, and isn't something you struggle with at all. If you start out making $0 in profit, but all your expenses are covered and you're not in the hole, you'll notice profit starts happening naturally just by doing more jobs. As the jobs get bigger, and you have to bring on more help to get them done, you'll already have the tools and skills you need to keep figuring out exactly what a job should be priced at to pay your costs, earn a living, and make a profit.
In our last few posts, we've covered the following:
- Simple Principles for Setting Prices
- How to Price a Job to Make Money
- Making Your Service Business Profitable
Next time, we're going to dig into keeping your personal and business finances, expenses, and bank accounts separate. But for now, we encourage you to dig in, get to know your costs, total them up, and take a hard look at what you're charging now to ensure you are pricing your services correctly to earn a living and make a profit. You'll be happy you did.