The fundamental goal of a business is to make a profit, not just to provide goods and services. This might seem harsh, but it’s true. The IRS can reclassify your business as a “hobby” if you do not make a profit for 3 years straight. And that would not be good for business.
In comparison, having a small profit or no profit at all on a business with considerable annual sales, is the easiest way to get audited by the IRS!
If this is the case with a business, then the owner loses in two ways: not only did he/she not make any money, but now they would have to pay a CPA firm, Tax Attorney, etc. about $10,000 to straighten it all out!
In my experience, working with hundreds of business owners, there are two main reasons why business owners do not make a profit:
- They do not charge enough; their prices are too low.
- They work in their business when they should work on their business.
Setting Prices Too Low
You may be wondering, “How does a business owner know if they are not charging enough?” If the owner looks at their monthly profit and loss report, this should give some answers.
If the business owner is working their butt off and looks at their profit and loss each month, and still does not show a profit, then they are either not charging enough, or they need to produce more valuable goods and services. The profit each month should cover the business owner’s monthly personal expenses and build some extra cushion. No one starts a business to live paycheck to paycheck! There should be extra money at the end of the month.
As a CPA, I see that most business owners are not making a satisfactory profit because they believe they are not valuable when they really are! As the owner, it is important to realize that anytime you tell a potential client your price, there is a risk of rejection.
On the flip side of that, if everyone is saying “Yes” to your prices every time you pitch them, then you are not charging enough!
The business owner must stay strong and say to themself, “I am valuable, and I cannot de-value our product or services”.
This is especially difficult during this time of Covid-19, when a lot of people are struggling, however, the business owner cannot throw their own business and personal needs to save their prospect money.
This brings up another point… stay away from cheap people! I would say 1 in 10 potential clients are prone to be “cheap” and to make their business choices that way. These types of clients will expect you to do work for free, and then complain about it.
As a business owner, you need to be confident in your prices. You need to know that your price is just right- not too high and not too low. You reserve the right to tell the “cheap” service seekers to have a nice day, and that you just are not the right fit for them.
As the owner of Simpson & Simpson Accounting, I want to offer a free 30-minute consultation to any businesses who need a review of their financials. Give us a call today to get back on track!