Pricing a service

In our last couple of blogs we’ve been talking about the importance of business planning and forecasting. In this blog we’re going to have a look at pricing of a service.

Pricing a service is more difficult than pricing products because you are calculating the value of your time and expertise rather than the cost of a widget.

You should consider the following when determining a price for a service:

 

–              Cost plus pricing

This is the standard method of pricing whereby you determine the cost of providing the service and then add an amount to reach the required profit.  To determine cost, you need to know all direct costs, indirect costs and fixed costs.  As an example – you employ someone on £15 per hour so to make a profit you need to add an amount which covers all overheads etc and generate a profit.

–              Competitors’ pricing

Need to be aware of what your competitors are charging for similar services in the marketplace and price accordingly.  But, don’t compete on price! You don’t want to be seen as cheap!

–              ¬Perceived value to the customer

This is the Holy Grail of pricing services.  A customer will only pay for a service based on what the perceived value of that service, and your expertise, is to them.  You need to convince the customer your service is of a better value to them than they would get elsewhere.

 

You need to calculate the cost of providing the service and this is comprised of 3 parts:

  1. Materials – cost of goods used in providing your service.
  2. Labour – cost of the person providing the service – keep an eye on number of hours involved. If this is just you then think about the value of your expertise and skills and the years taken to achieve this, to put a figure on your cost.
  3. Overhead costs – as mentioned in our previous blog these are also called indirect costs eg rent, advertising, stationery etc.

 

The next step to ascertaining your price is to add a fair profit margin.

This may not be the final step in setting the price as you will also want to take into account the other pricing strategies mentioned earlier – competitors pricing and the perceived value to the customer – in order to come up with a final price where you will achieve sales of your service.

You can also find your break-even level where the income generated from sales matches all expenses.

I would advise that every business should know where its break-even point is so that you know if the business is viable and will make money. If you’ve been in business a few years then you will probably know what this point is.

If you need help on pricing your service then pick up the phone and speak to Sharron. Here at Westwood Accountancy we speak plain English. We can help you with your business finances leaving you time to get on with what you do best – running your business.

Business Forecasting Part 2

In our last blog we discussed the need for financial forecasting. In this blog we will take you through the main elements of what you need to consider when doing your forecasting.

  1. Sales Forecasting

Ideally project your sales over 2-3 years on a monthly basis for the first year and on a monthly or quarterly basis for the second and third years.  This will also include your pricing strategy and how to price your product or service. Our next blog will take a look at how to price.

The amount of sales you are forecasting will underpin your entire business so be realistic when looking at how many sales you will achieve. Forecast too little and you may not attract the funding you want. Forecast too much and you won’t achieve them!

 

  1. Create an Expenses Budget

You need to know how much it’s going to cost to make the sales you have forecast.  You can split the costs into materials and labour, which are also known as direct costs, and are part of the cost of sales in the Sales Forecast.  Overheads, which are also known as indirect costs, can be split into fixed and variable costs.  Fixed are things like rent, rates, payroll whereas variable are costs such as advertising and promotional expenses.

 

  1. Develop a Cash Flow Forecast

Cash is King and needs to be kept a close eye on as even a profitable business can run out of cash if its customers don’t pay on time.  Use your sales forecasts, expense budgets and balance sheet items to create this.  Use a realistic expectation of when your sales invoices will be paid so that you can project cash requirements for paying expenses.  Don’t forget to factor in items such as VAT and tax payments.

 

  1. Income Projections

This is a Profit & Loss Account. Use the numbers from the first three schedules above (i.e. sales, expenses, cash flow) in order to build this up.

Again, it is good practice to revise this monthly with actual figures so that you can see how the business has performed and alert you to any potential problems.

 

  1. Deal with Assets & Liabilities

You’ll also need a projected Balance Sheet. This is a snapshot of your business at a point in time showing the net value of the business. There are items in the business which don’t go into the P&L e.g. capital elements of a loan, stock held, accounts payable and receivable, assets such as equipment etc, but which are still part of your business.

 

  1. Break-even Analysis

The break-even point is where income from your sales matches the expenses going out of the business and every business should know where this is so they can see if the business is viable. The ideal situation is to reach break-even and then grow from there as every additional sale is then contributing towards the profit.

 

We will be covering some of these sections in more detail in future blogs. However if you want to know more then pick up the phone and speak to Sharron on 01207 509871.

At Westwood Accountancy we are friendly accountants. We won’t bamboozle you with accountancy! We will talk to you in plain English.

So if you’re at a cross roads with your business and want some help with your forecasts we will help you.

 

Business Forecasting Part 1

Business forecasting should form an integral part of your business plan.

Business planning and financial forecasting may be required for a number of reasons:

  • FUNDING – if you need funding to start up or grow then all lenders will assess your forecasts.
  • LOOKING FOR A BUSINESS PARTNER – robust financial forecasts will show them to join you.
  • SELLING YOUR BUSINESS – a prospective buyer will want reassurance that the business will continue and has potential to make them money.

 

The forecasts you produce will be ongoing and changeable according to circumstances and should be a guide to running your business.  So, if in the future you feel that you need funding from a bank loan or another source, you already have the documents/plans in place to go and see these people.

When creating a financial forecast, it may not necessarily be done in sequence; there may be an element of ‘jumping around’ between the different sections as the results of one section may cause change to be made to another section.  In fact, you’ll probably find each section will need revising a couple of times until the overall outcome is acceptable to you.

Our next few blogs will take you through some of the elements of financial forecasting.

But if you need our help with your forecasting then pick up the phone and give us a call on 01207 509871.

Sharron will talk to you with plain English. She won’t bamboozle you with accountancy! We’re here to help so if you’re looking for funding for your business or you just feel like you need to get a better grip on your business finances then give us a call.

Working from home – tips on your accounting records

Lots of business people work from an office at home these days. So what are the things you need to be doing when it comes to your business record keeping?

If you’re a sole trader then you can claim a proportion of your household bills, utilities, council tax, water rates etc and the interest element of your mortgage. You can do this by using the number of rooms’ method or area of house method. Make sure your calculation is reasonable and you can prove how you calculated it then the HMRC shouldn’t have a problem with it. From April 2013 an alternative to this is to claim a fixed rate allowance, the amount of which is dependent on the number of hours per month you work from home “wholly and exclusively” for the purposes of your business. The amount which can be claimed varies from £10 to £26 per month.

If you’re a limited company then you are an employee of the company and can claim £4 per week of expenses for working from home. However if you’re a homeowner then you can charge the company rent for use of premises. Be very careful if you’re doing this though as the room must be purely for business use and there may also arise the issue of business rates and liability for capital gains tax on the sale of the property.

Also if rent is charged then this will be included in your self assessment tax return as rental income and offset any premises costs against it.

So if you do work from home make sure your accounting records reflect this. You could be missing out on saving money if you’re not accounting for it properly.

Always seek professional advice before embarking on any claims.

Westwood Accountancy will offer you friendly advice on where you could potentially save money. Drop me a line on sharron@westwoodaccountancy.com or give me a call on 01207 509871 and let’s have a chat.

 

I'm an accountant not a magician

 

What a Chartered Management Accountant can do for you.

What is a Chartered Management Accountant?

A Chartered Management Accountant is a member of CIMA, the Chartered Institute of Management Accountants, and their training and experience has all been done in actual businesses rather than in an accountancy practice where you will mainly find Chartered and Certified Accountants.

This industry experience gives Management Accountants the day-to-day knowledge of working within a business and an understanding of what happens from the inside.

What is Management Accounting?

CIMA definition is “Management Accounting combines accounting, finance & management with the leading edge techniques needed to drive successful businesses.”

So you can see, this is more than just producing a set of accounts at the end of the year.

So what do CMAs do?

We;

  • ADVISE about the financial implications of projects. For example, what is the cost of putting in a new software system, not just in terms of the actual system, but all the related costs too.
  • EXPLAIN the financial consequences of business decisions. For example, if you put your prices up 10%, what effect will this have on your bottom line.
  • DEVISE your business strategy with you. For example where is the company going and how is it going to get there?
  • MONITOR spending & financial control. For example through the use of management accounts and budgets

In order to do these things Management Accountants need a certain skillset and this consists of:

    ANALYSIS – they analyse information and use it to make business decisions
  • RISK – they identify and manage risk
  • PLANNING – they apply accounting techniques to plan & budget
  • COMMUNICATION – they determine what information is needed and explain the numbers to non-financial people.

A Chartered Management Accountant can use all of these actions and skills to help any business, regardless of whether it is a one-man band or a big plc.

6a00d8345157c669e2017eea178ec8970d-640wi1

So do you need a CMA?

If you run a business and you want to improve your bottom line then YES you need a CMA. CMAs will help guide you and your business, and help you make those tough business decisions that need making.

Here at Westwood Accountancy we have all the skills to help you with all these business decisions. Sharron is an experienced Chartered Management Accountant and she will help you and your business make the right financial decisions and improve your bottom line. She speaks plain English and will work with you to make your business perform to its maximum.

Give Sharron a call on 01207 509871 or drop her a line on sharron@westwoodaccountancy.com

HMRC – helping to get it right

Having recently attended a Derwentside Business Network event hosted by a member of the HMRC Business Education and Support Team, Westwood Accountancy are delighted to be able to share the following useful information with our clients and colleagues to help you run your business.

Whether you are an employer, a self-employed individual or are even just thinking about starting out in business, then the information contained in these links will be beneficial.

HMRC offer a variety of free webinars for businesses and the self-employed. Please click on the link below for more information and to see the full list of the subjects available.

Free Webinars

There are also e learning packages available and we have included one specifically for starting out in business.

Starting Your Own Business

Tax Help from HMRC

We hope you find them useful!