January 23, 2015
Last month, I hired a bookkeeper. This is a big step for any business owner. The day you can hand over the reins to the bane of most entrepreneurs’ existence is a day to be celebrated!
But I didn’t hire just any bookkeeper. I hired Joanne, a Profit First Certified Bookkeeper! And she has totally transformed the way I do business from a financial perspective!
One of the major transformations came in very useful two days ago. Before Joanne, when I contracted someone to do work for a client, I asked them how much they would charge me based on the requirements.
Then I would blindly accept the offer, not knowing if it was within budget. Hell, I didn’t even HAVE a budget!
I didn’t know what my profit margin was, or even what it should be. I didn’t know what my true costs were, or how much they should be. I didn’t know if I was charging too much or too little.
If it had a dollar sign in front of it, I didn’t know anything!
Enter Joanne. She first recommended I read Profit First by Mike Michalowicz. If you haven’t read it yet, read it now (even before you read E-Myth). It will change your business forever…and it just might allow you to STAY in business forever.
My 3 main takeaways from the book and from Joanne’s guidance are:
- Take out your profit first, even if it’s only 1% to start.
- Pay yourself next, even if it’s only a small amount to start.
- Make sure you’re charging enough to have a profit, pay yourself and cover all of your other COGS (cost of goods sold), taxes and operating expenses.
The big question then becomes, what is the right amount to charge?
As a good rule of thumb (depending on your industry) you should spend no more than 40% on COGS. That leaves 60% for profit, your pay, taxes and operating expenses.
If you don’t know what your COGS are, you need to figure that out immediately. For my marketing agency, it includes project costs like labor and software specific to the project, and the sales commission on the project.
With your COGS in-hand, here’s how to calculate what you should charge:
COGS / 40% = Price
If your COGS is $1,000, then your price should be $2,500. That’s because you only want to spend 40% to deliver the goods and $2,500 x 40% is $1,000. Piece of cake!
Depending on your industry, your gross profit margin may be vastly different. For airlines, it’s only about 5% while for most software companies it’s closer to 90% (source).
(Which reminds me, our prices will be going up to be more in-line with our direct competitors who charge a lot more than we do. If you want the best rates, better do it now.)
Let’s circle back around to how this knowledge came in handy two days ago. That’s when I told a contractor how much I could pay her instead of asking how much she would charge me. Instead of letting her set the terms, I set them.
Thanks to Joanne, I feel like a curtain has been lifted from the most challenging aspect of entrepreneurship that I’ve never quite mastered. With the curtain raised, I feel a sense of liberation and understanding that’s hard to describe.
If you want an awesome bookkeeper to help you transform your business into a profit generating machine, contact Joanne at LLJGroup.com. She’s worth her weight in gold!
(btw – We’re rebuilding Joanne’s website now and the contractor I’m referring to in this newsletter is building it as we speak…for the amount I told her we had budgeted. Check out Joanne’s site in a couple weeks for the finished product. It’s gonna be beautiful!)