According to SmallBizTrends, only 40% of small businesses are profitable. In my years of working as an outsourced CFO, I have seen this dilemma many times among service-oriented businesses. There are numerous possible reasons businesses may not make a profit, but I have found a common culprit. If a healthy profit has been eluding you, or you are not even sure what your net profit margin is for each of your services, read on to discover the secret to uncovering your lost profits.
Uncovering Your Lost Profits
Running a business takes grit, endurance, and savvy. All three come naturally to some, but sometimes you have to work hard to find success in one area or another – or sometimes all three. Savvy is perhaps the most elusive one, as business savvy can mean many different things. But for everyone, business savvy means making a healthy profit.
Let me ask what may be an uncomfortable question: are you making a profit on each of your services?
You may not know the answer, and if so, you are not alone. Many service-oriented businesses didn’t know how to do a proper cost analysis to figure out what “healthy profit” looked like for them. They came to me looking for help to determine what it actually costs to provide each of their services, so they could make a healthy profit on all their services. You might be in the same boat…
- Are you profitable but really struggling to grow?
- Do you have lots of revenue coming in but little to no profit?
- Have you tried to put a number on how much your services cost but end up guessing?
If you are experiencing any of these pain points, the good news is that this type of business savvy can be learned with the right people on your team. You don’t need to keep winging your pricing model, and you certainly don’t have to keep using an out-of-date pricing model just because you don’t know what else to do.
The first step in pricing your business services to achieve a healthy profit is to know exactly what it costs you to provide each of your services. Once you know your costs, you have more control over your profit. If you offer a variety of services, this can especially cloud the quoting process when your customers start to mix and match their purchases. Maximizing profit for each of your services can only happen when you start from a confident and clear cost analysis.
Depending on your industry and service offering, a cost analysis will look different from business to business. But the key is to examine all costs that go into delivering your service, breaking down as many pieces as you can to isolate what exactly goes into the service (be sure to include your overhead rate, too). By doing so, you may discover that some services can never have a healthy profit, so you remove them from your offering. Or you may find there is a specific service that deserves more attention because it has been your hidden cash cow. Whatever the outcome, your business can achieve a healthy profit by starting with a proper cost analysis that removes the guessing game and puts real numbers into your business strategy equation.
Many of my clients come to me because they suspect they are selling services at a loss. Once we work together and figure out the correct pricing for each of their service offerings, they are able to transactionally pivot to marketing the service at a price that brings profit. The goal at the end of the day is a healthy profit margin for your company that meets industry norms. I love solving these financial mysteries, and can help get you there!
For businesses with annual revenue over $1 million, I’m an expert in corporate finance who can bring you the clarity you need. As your outsourced/fractional CFO, I can help you with a variety of business services. Hop over to my website to learn more!