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.

Time flies when you’re having fun.

As you may or may not know I have just come back from my holidays celebrating my first wedding anniversary. I cannot believe that it is a year since Tony and I got married, it has been such a busy year in the business that time has whizzed by so fast.

Wedding pic

This got me thinking about time and in particular deadlines. If you run a business then you’ll know all about deadlines! I thought I would take a quick moment to run through the main ones if you have a business. If you miss deadlines then some will incur fines. So I cannot stress enough that you need to be on the ball otherwise it can work out to be very expensive.

Limited Company accounts

Unless you are filing your company’s first accounts the time normally allowed for delivering accounts to Companies House is:

  • 9 months from the accounting reference date for the private company; or
  • 6 months from the accounting reference date for a public company.

If you are a day late filing your annual accounts with Companies House the fine is £150, this increases to £375 if you don’t file within 3 months and even more after that. They raised £59.1 million in fines last year. That’s an awful lot of late filing done!

VAT Returns

These are due quarterly and have to be submitted and paid by the end of the month following the quarter end plus 7 days. So for example, if your VAT quarter ends at the end of September then your return needs to be submitted and paid by 7th November.

Tax returns

These need to be submitted and paid by 31 January following the end of the tax year. For example, the 2013 to 2014 tax year ended 5 April 2014. The main deadlines are:

  • Paper tax returns – midnight 31 October 2014
  • Online tax returns – midnight 31 January 2015
  • Final payment of any tax due – midnight 31 January 2015.

Payroll and N.I.

For employers who pay N.I. and PAYE this is due on the 19th of the following month.

The RTI (Real Time Information) submissions for the payroll, which tells HMRC how much PAYE and NIC people pay, must be made on, or before, the day people are actually paid. If it is made the day after payday then it is late, and you could get a late-filing notice and possibly a fine.

If you run a business you need to be aware of all of the deadlines that are appropriate to you. If you get a bit overwhelmed by all the deadlines that you need to know about then get in touch. Here at Westwood Accountancy we keep an eye on the deadlines for you and can help you make sure that you’re organised, and more importantly, not incur fines or penalties.*

Give me a call on 01207 509871 or drop me a line to sharron@westwoodaccountancy.com

*All information contained in this blog correct as at September 2014

Why your business should be budgeting and planning its finances?

Ok so you run a business and some month’s cash is a bit tight. Sound familiar? You might need to look at better budgeting and planning.

What’s a budget?

A reasonable estimate of your sales, costs, profit and cash over a specific future time period.

Why do you need to budget?

  • It will allow you keep a close eye on your sales, costs and probably most importantly, your cash.
  • Knowing what expenses will be due in the coming months will allow you to make sure you have sufficient funds to cover them.
  • It will give you the chance to fully analyse your costs and make changes where necessary.
  • You will be able to track your forecasted sales over a period of time. This will then allow you to see when you will have peaks and troughs in demand and as such you will be able to manage them accordingly.
  • Give you a realistic expectation of profits or losses. If you are forecasting losses you will be able to assess the sales and costs figures and make adjustments accordingly.

birthdaycard

If you know you should be doing robust forecasting but you don’t know where to start then speak to Sharron. She can help you understand your business better and work with you to forecast accurately.

Drop Sharron an email on: sharron@westwoodaccountancy.com

Or give her a call on: 01207 509871

Good bookkeeping

So why should you have good bookkeeping?

Well that answer is quite simple. It will save you money. Yes it really is that straightforward.

Why will it save you money?

If you run a business then good bookkeeping makes the preparation of your annual accounts so much easier. This will cut down on the amount of time your accountants needs to spend going through your income and expenditure.
Cash collection – you’ve probably heard the phrase “cash is king”. This is so true. If you’re keeping good records in your business then you will know which invoices have been paid and which invoices haven’t. So you’ll know what money you are owed and what you need to chase.
Balancing the petty cash

fisher-osu-edu-300x250If you run a business and you know your bookkeeping skills need some time and attention why don’t you head across and see me? We can talk about the systems that you currently use and maybe look at some alternatives that might save you time and money.

Here at Westwood Accountancy we are here to help you so drop me a line on sharron@westwoodaccountancy.com or pick up the phone and give me a call on 01207 509871.

C’mon let’s start saving you some money!

Key Performance Indicators and why they’re good for any business.

In our last blog we chatted about what a Chartered Management Accountant is and how they can help you in your business. In this blog we would like to share with you some tools that Management Accountants use that will help you analyse your own business success and give you information that you can use to plan for growth or just monitor your performance.

Too many businesses bumble along on a day-to-day basis without really knowing where they are going, how they are going to get there or even if they are anywhere near the “there” at all. Hopefully after reading this blog, you’ll have something you can use so you don’t fall into this as well.

To make your business even more successful have you thought about using Key Performance Indicators or KPIs? A KPI is basically a measure of business success; however for a KPI to be a good one it should have various qualities.

A way to remember these is by the mnemonic TRAC VW

So, a KPI must be:

  • TIMELY – it must be provided in good time so that a business can take any remedial action to get back on course, weekly, monthly etc.
  • RELEVANT & RELIABLE – you must be able to rely on the information and it needs to be relevant to the business success and goals.
  • ATTRIBUTABLE – it must be produced as a direct result of what the business is doing and not measured against something which is out of the business’ control. For example, a garden centre may think that monitoring the weather against the volume of sales is a good measure, but they can’t control the weather, so a better measure would be the value of sales per square foot/metre of retail space.
  • COMPARABLE – there needs to be consistency in what you’re measuring otherwise it’s difficult to know whether you have actually improved.
  • VERIFIABLE – the information needs be easily seen, where it came from and not argued against.
  • WELL-DEFINED – so anyone in the business can understand what it is measuring. There should be no doubt about what it is measuring or what goes into the figures being produced.

Let’s have a look at some good examples of KPIs

Most people would think that KPIs are financial, most common being Net Profit and profit margins, however I would encourage you when thinking about KPIs, to address all areas of the business to give a rounded view as finance is just one part of a business’ operation.

A very well-known management accounting tool which does this is called the Balanced Scorecard which divides a business into 4 perspectives and encourages KPIs to be introduced in each one in order to keep an eye on the whole business performance.

These perspectives are:

FINANCIAL – obviously every business wants to make money

CUSTOMER – you can’t afford to take your eye off the customer or the customer will go elsewhere

STAFF/LEARNING – invest in the right people, develop the right skills to be the best at what you do

PROCESSES – understanding what your internal processes are and make them as efficient and effective as possible.

And examples KPIs relating to these are:

FINANCIAL – Turnover, net profit, expenses as a percentage of sales

CUSTOMER – number of new customers per week/month (if measurable), retention rates, satisfaction

STAFF/LEARNING – revenue per employee, salary costs as percentage of sales, absenteeism rates, CPD courses

PROCESSES – employee productivity, quality of products/services, leads generated & lead conversion rate

It has been said that if you fail to monitor the business in all of these areas, it is like sitting on a 4 legged stool which has a leg missing and is wobbly and so you are likely to fall off.

Hopefully you can see the benefit of monitoring your business in all of these areas.

So if you would like help developing your balanced scorecard then get in touch with me on 01207 509871 or drop me a line on sharron@westwoodaccountancy.com. I can sit down with you and help you work yours out too.

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It’s not like this at Westwood Accountancy!