Pricing, profit and paying yourself

Frankly, we don’t talk enough about pricing, profitability or paying yourself as small business owners. 

So let’s talk. 

Paying Yourself

This is why you started your business - to make money doing something you love. But did you ever ask yourself

• How much do I want to make?

• How long will it take for the business to pay me at that level?

• When will I be able to afford to be paid by the business without working in it?

• What are the ways I can be paid and what do I need to know about things like owners draws, net income, and taxes?

Building a business that isn’t or can’t achieve your financial goals is a waste of time, IMHO. If you don’t need the money and the business isn’t profitable then it's a hobby, and that’s ok.

I love hobbies but I don’t expect my crocheted blankets to pay the bills and while I love coaching and consulting with business owners I won’t keep doing it if it means I struggle to make ends meet.

I assume all business owners want their business to help them create a life they love, one that has some degree of financial comfort, perhaps even freedom. 

So let’s get real about what you want to make and how frequently you need to be paid. 

Then figure out how much the BUSINESS has to make for you to hit your financial goals and take care of your obligations (taxes.) You can use this template to get started. 

Profit

You can’t pay yourself competitively and consistently if your business isn’t generating a profit. 

Just because there’s money coming into the business doesn’t mean it’s profitable. 

Profit is what’s left over AFTER you pay all the bills (COGs and operating expenses), pay yourself, set aside money for taxes, and service debt. 

Profit allows you to create a reserve so you can fund your operations for at least 3 months. 

It gives you flexibility to make new hires, buy new equipment, upgrade technology, or make other investments to grow your business. 

It gives you breathing room so you don’t have to panic each time payroll is due. 

In many businesses, it’s reasonable to expect that you won’t be profitable right away. You may have to put more money into the business than you take out. That’s why it’s so important to do projections (the silent P in this list!) Projections are a way to forecast the future. IF we do A, B and C we can expect the result to be X, Y and Z. 

Like profit, projections don’t magically become true. They’re your best guess about how to run your business so it can meet all its financial goals. Never run projections or want some help getting better, click here to schedule an appointment. 

Pricing 

Pricing truly is both an art and a science. 

Some industries are price sensitive with most sellers priced in a narrow range because buyers won’t tolerate big deviations. 

Whenever possible, you’re not looking for the customer who wants the lowest price. Your customer wants the best outcome - whether that’s to look and feel beautiful, save time, or increase performance. They want specific results they’re willing to pay for. 

Pricing requires you to understand what it costs you to produce and deliver your goods and/or services, what indirect expenses you need to cover, and your desired profit margin. 

The single biggest pricing mistake I see owners make is to leave the cost of their labor out of the pricing equation. 

In most small businesses, the owner is doing a key business function. You’re probably the person making the body butter, providing the counseling, doing the renovations, designing the greeting card - you get the idea. If you were paying someone else to provide that labor you would consider them a direct cost. So why wouldn’t you do the same for your labor?! 

You can never replace yourself in the business if you aren’t factoring the cost of your labor into your price AND paying yourself market rate for doing that job. 

Just ‘paying yourself out of profits’ isn’t a thing for small business owners. You can’t live off a quarterly dividend. You need the equivalent of a regular salary. And one of the benefits of ownership is that you can take additional distributions when profit margins allow. 

So your price has to take into account what it will cost to pay you, cover other direct expenses, and contribute to indirect expenses, profit and taxes. 

Once you create your pricing template you’ll use it when considering pricing changes, creating new products, launching new services, or creating new packages. Not sure where to start? I’ve got a template for that too!