How do hourly pricing models work?
Do you run a business that charges clients by the hour? Whether you’re an accountant, lawyer, designer, or consultant and you’re ready to expand – or hope to one day – there are a few things to consider to make sure your growth strategy is profitable. Let’s start with the basics… How does the billable hour pricing model work? “Billable hours pricing” is a method used by many different services with one thing in common – customers pay by the hour. Businesses that use this model estimate the maximum number of hours in a year that they can generate revenue, and use that number to set hourly rates. Here’s an example: Dr. John Watson owns a private investigation firm and is the sole investigator. He plans to work a typical 40-hour workweek and take two weeks off for vacation. 40 (hours per week) x 1 (employee) x 50 (workweeks in a year) = 2,000 billable hours But Dr. Watson is not a robot and has to plan time during the workweek to eat, travel to clients, and handle administrative work in the office. He estimates this will take about 1,000 hours. 2,000 (billable hours) – 1,000 (non-billable hours) = 1,000 maximum billable hours for the year Watson has already determined that his business’s operating expenses (marketing, administrative, office lease, etc.) will be quite low since he is well-known and works from home. He uses that figure to set his break-even rate. $20,000 (total expenses) / 1,000 (maximum billable hours) = $20 per hour If Watson charges just $20/hour, he’ll be able to cover all of his expenses. Anything higher than this number will go straight to the bottom line, which is why he’s decided to charge $60/hour. So what you’re saying is I should just bill more hours, right? Unfortunately, it’s not so elementary. Looking at the last equation above, you’ll see that lowering expenses, increasing the number of billable hours, or increasing rates could all send profits skyward. But if you’re a sole proprietor and many of your expenses are fixed, what are you to do? Grow my team?! If Dr. Watson hired a junior investigator at $30,000/year… $30,000 (salary) / 2,000 billable hours = $15/hour nominal cost could he simply re-bill her at $30/hour? Keep in mind that you have to account for federal holidays, employment tax, vacation and sick time, in-office work, and training for new staff. When all is said and done, the true cost of an employee is actually double their “nominal cost,” which means he’d have to re-bill his junior P.I. at much than $30/hour to make a profit. Expanding your staff could be the answer, you just have to be sure the numbers work out. So, hire several more people all at once? This could also be a solution, but with more employees comes more clients to maintain employee turnover, and a need for more office space and support staff. Hiring subcontractors, versus full-time employees, does offset some of those issues, but subs typically charge higher rates since no one is covering their vacation time and health insurance. Can’t I just increase my prices? If Dr. Watson increases his hourly rate from $60 to $70, this $10 increase would yield $10K more in pure profit. But he risks driving away loyal clients or attracting a different type of clientele that come with challenges he hasn’t faced before. Increasing your rates is a viable solution, as long as your customers are prepared and see a good reason for it. As you can see, growing a billable-hours business can be done in a number of ways, but you’ll have to use your powers of observation to determine which method makes the most sense for your business. [av_sidebar widget_area=’Blog Post Disclaimer’ av_uid=’av-om2w’]
Pass-Through Deductions: What It Is and Who Qualifies
One of the best small business-friendly aspects of the Tax Cuts and Jobs Act (TCJA) is the 20% deduction you can take on your income tax if your business is a pass-through entity. Here’s what you need to know about it. What Is the Deduction The TCJA was passed in 2017 and first applied to 2018 tax returns. Provision 199A of that law states that you can deduct 20% of your “qualified business income” which was earned from a “qualified trade or business.” What Is a Pass-Through Entity Any business structure that allows you to receive income as an “owner’s draw” rather than as a regular employee is a pass-through business. The money is “passed through” from the company account to your personal account. You only pay income tax on it with your personal return; you don’t have to file a separate return for the business. Pass-through entities include:• Sole proprietorship• Partnership• LLC (limited liability corporation)• S-Corporation However, there are some restrictions. Taxable Income Restriction • Less than $157,500 (single, married filing separately, head of household) or $315,000 (married filing jointly): you qualify for the full 20% deduction.• $157,500 – $207,500 or $315,000 – $415,000, respectively: your deduction may be less.• More than $207,500 or $415,000, respectively: you are not eligible for the deduction. Specified Service or Trade Restrictions What your business does may disqualify it from the deduction. Here’s the list of excluded fields, as issued by the Treasury Department in August 2018: • Health• Law• Accounting• Actuarial science• Performing arts• Consulting• Athletics• Financial services• Brokerage services• Any business where the principal asset is the reputation or skill of one or more of the employees or owners• Any business that consists of investing and investment management, trading or dealing in securities, partnership interests or commodities But don’t give up if you see your business in one of these categories, because there are numerous exceptions. For example, in the Health category, healthcare providers who provide services directly to patients — such as doctors and dentists — are not eligible. On the other hand, health clubs, spas, medical research companies, and those who sell pharmaceuticals or medical devices may qualify for the deduction. In the case of businesses who both provide services and sell products, eligibility is determined by sales:• Less than $25 million in gross receipts and less than 10% of your business comes from disqualified services; or• More than $25 million in gross receipts and less than 5% of your business comes from disqualified services Employee and Property Restrictions There are two further conditions that could affect how much of a deduction you can take. They are:• Business that pay W-2 wages• Business that owns “qualified property” such as real estate or other tangible assets that can be depreciated If your business fits either of these descriptions, your deduction will be the lesser of:• 20% of qualified business income (or the “tentative deduction”); or• The greater of:o W-2 wages paid x 50%; oro W-2 wages paid x 25% + the unadjusted basis (cost) of your qualified property x 2.5% Still confused about the pass-through deduction? Your xendoo small business expert can clear things up, answer your questions, and help you get every tax break you deserve.
5 Benefits of Owning Your Small Business Property
Is it time to purchase the commercial property you’ve been leasing? If you’re a small business owner who currently rents office or retail space, you could be in a position to benefit from becoming an owner. Of course, the decision to own or rent will depend on a number of factors unique to your business, such as your location, revenue, and business experience. But there are general positives for your business that come from purchasing commercial real estate. Here are five of the top benefits you could expect to enjoy should you transition from renter to owner. 1. The ability to build equity in your property Perhaps the greatest drawback to leasing a commercial property is that every monthly payment simply ends up in the landlord’s pocket. However, purchasing that space gives you the ability to immediately start building equity in the property. If that property increases in value over time, you can cash in by selling or leasing the building. Those who secure a loan to help purchase commercial real estate also have the option to tap into their equity by executing a cash-out refinance. By refinancing and taking out a larger loan, a borrower can convert their existing equity into cash. The amount of the original loan is then repaid to the lender while the rest can be used for business improvements or future investments. 2. The creation of additional revenue streams If you purchase office, retail, or warehouse property that your business can’t occupy completely, you have the opportunity to establish a new revenue stream by leasing the additional space to tenants. Rental income can play an important role in bolstering your revenue during difficult periods for your business. This can provide a real sense of comfort for those working to get their small business off the ground. It must be noted that taking on tenants requires project management capabilities you may not currently possess. If you do plan on leasing a portion of your commercial property, consider investing in property management training or hiring a professional to assist you. 3. Tax benefits Owning commercial real estate puts you in a position to enjoy tax benefits that could significantly impact your bottom line. As an owner, you can take advantage of depreciation deductions and mortgage interest write-offs that can offset the cost of your original purchase and generally ease the tax burden you may currently feel each year. Be sure to consult a tax professional to learn more about the benefits (and potential drawbacks) of owning commercial real estate. 4. Freedom and control Renting a commercial property leaves you with few options when it comes to renovations or additions. This can be a real source of frustration for those who enjoy being in control of all aspects of their small business. Once you own your office or storefront, you have the freedom to truly make it your own. If you purchase your restaurant’s building, for example, you could finally create more room for tables or redesign the kitchen. Getting these types of changes approved by a landlord can take ages – by the time you’re able to make a necessary change, your business has already suffered irreparable damage. With control also comes consistency. Owners of commercial real estate never have to worry about a landlord’s rent hikes or rule changes that can stunt a business’ growth. 5. Appreciating value Commercial real estate investments have a history of strong appreciation. Besides the general demand increases that come from scarcity in an active market, commercial real estate can appreciate in value based on their ability to generate income. This means that as the owner of a commercial property, you have a hand in increasing the asset’s value. By renovating the building or adding rentable space, you can effectively add value to your original investment. This is one of the main advantages a hard asset like commercial real estate has overstock or bond investments. Owning commercial property is not without its disadvantages as well. The purchase price itself may be staggering for those just starting their business. Additional challenges having to do with building repairs or tenant vacancies can be debilitating for business owners who don’t have the resources to manage them. But you may find that the benefits of finally owning your own office or retail storefront far outweigh the potential difficulties. If you value day-to-day control and have a long-term vision includes both your business and the building it occupies, ownership may be your best bet for success. If you’re interested in purchasing a commercial property, one of your first steps should be to determine the financing solution that makes the best sense for your business. Commercial Direct, a division of Silver Hill Funding, LLC, specializes in providing flexible commercial mortgages to small business owners – even those with tax documentation issues that make it difficult to work with traditional banks. Author: Zack North Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence. [av_sidebar widget_area=’Blog Post Disclaimer’ av_uid=’av-om2w’]
7 Steps for Retailers to Reduce Inventory Shrinkage
Inevitably, somewhere between the manufacturer and the cash register, some of your merchandise disappears. Every retailer has this problem; in fact, it adds up to more than $42 billion in annual losses nationwide. The three biggest causes of shrinkage are administrative errors, employee theft, and customer theft. Here’s how to counteract them. 1. Use a good inventory management system. Wherever human beings are doing the counting, organizing, and recording, errors are sure to happen. Choose software that: Organizes product and vendor information Integrates with your POS system so that inventory data is automatically updated after every transaction Generates accurate purchase orders 2. Tighten up your inventory receiving process. To minimize mistakes: Cross-check against the PO at the time of delivery Call the vendor within 24 hours to resolve inconsistencies Tag and label merchandise immediately 3. Record sales consistently. Any currently available POS system will do this automatically. 4. Take physical inventory. It’s the only way to reveal discrepancies between what your inventory software says you have and what you have. Cross-reference the manual counts against software records to see where shortages are occurring, for example with a particular cash register or employee, or during the same shift and day every week. 5. Train employees in loss prevention. Letting everyone know that you have a strong plan to stop theft can deter both employees and customers. 6. Improve pre-employment screening. The reality of retail is that employee turnover is high and company loyalty usually low. Besides, employees have less supervision and easy access to your valuables. Do your due diligence in hiring people with no history of dishonesty, including nationwide criminal background checks and verification that resumes are complete and truthful. 7. Install a security system. Large, visible cameras act as warnings to thieves to pick an easier target. They also help catch and convict criminals after thefts occur. Inventory shrinkage is a challenge that will never go away. And that means your efforts towards loss prevention can never stop either. Success lies in ongoing processes and continuous attention to keep your merchandise right where it belongs.
3 Great Cash Flow Ideas for Retailers
What do a used book store, garden nursery, and boutique clothing shop all have in common? No, this isn’t the set up to a joke. Unfortunately, all three types of businesses are at risk of failing if their cash flow isn’t in good shape. According to the Small Business Administration, “inadequate cash reserves” is a top reason small businesses close their doors for good. So whether you sell novels, shovels, or dresses with ruffles — if you’re a retailer, cash flow is king. What exactly is cash flow? Think of it like a checking account. Cash flow looks at all the money coming in and out of your business each month. If there’s more coming in than going out, you’re in the green! If you’re spending more than comes in, read on. That means your cash flow is negative and your business could be in trouble Here are three simple ways to get your cash flowing in the right direction. 1. Bundle products If you sell several accessories apart from your core offering, try packaging them together with a small discount. This can also be an effective way of clearing out dead stock while creating goodwill with your customers, who feel like they’re walking away with a great deal. 2. Understand the risks of discounting If you do decide to bundle products or offer another type of sale, make sure you know exactly how that will impact your bottom line. You should know the profit margins on every product you sell and your overall cost basis – it’s the only way to determine if you’ll break even with the sale or take a loss. 3. Encourage repeat business Offering perks or freebies to returning customers helps create loyalty and makes it easier for them to choose you over other options. Go old school with a punch card, get creative with a contest, or print an offer on receipts that are good for a future purchase. If you’re struggling to determine the state of your cash flow, it could be time to call in for some backup. With xendoo’s suite of affordable bookkeeping and consulting services, you’ll be able to spend more time at the “cash-out” bringing the cash. [av_sidebar widget_area=’Blog Post Disclaimer’ av_uid=’av-om2w’]
Pricing Your Services: Don’t Sell Yourself Short
Does this sound like you? You offer great quality service, you have an excellent customer base, but you’re still making very little if any, profit. There could be many reasons for this, but one of the most frequent is that you’re not charging enough. Here’s how to stop undervaluing yourself and get the money you deserve. Find out what’s behind your excuses. Right about now, you’re probably thinking that you charge as much as your customers will tolerate. But if your competition is charging more, what’s the real reason for your low prices? Consider these possibilities: You’re insecure about the quality of your skills or service You haven’t added up all the benefits your client receives You haven’t analyzed your competitive advantages and differentiators You work extra long hours without getting paid extra The vicious cycle of low pricing. When you underprice your services, there are more consequences to your business than minimal profit margins. The more you lower prices, the worse your business gets, and the worse your business gets, the more you’re forced to lower prices. You attract problem clients who will nitpick, disrespect your expertise and try to drive your prices even lower Problem clients create an environment that repels good clients You have no room in the budget for promotions and marketing, which attract more — and better — clients than low pricing does Talented staff don’t want to work for you 6 steps to getting the prices right. Work on your personal attitudes to self-worth and wealth acquisition, which may date back to childhood. Do a competitive analysis: the benefits you bring to clients and ways that you’re different/better than competitors. If you can’t think of any, plan how you’re going to change that. Immediately raise your prices to new clients by 20%. Transition existing clients more gradually. See how that works for a few months, then adjust as necessary. Charge overtime for excessive demands for your time and talents, or just say no. Make marketing and promotions plan to attract new, quality clients. Bring in experts to support your weak areas, such as accounting or marketing. Valuing yourself at your true worth isn’t just good for your soul, it’s good for your business. Get started on these tips today — you deserve it! [av_sidebar widget_area=’Blog Post Disclaimer’ av_uid=’av-om2w’]
Developing a Pricing Strategy for Professional Services
As a professional services provider, did you know that the way you price your services is actually part of your overall marketing strategy? Whether you’re an accountant, lawyer, or business coach — if you’re pricing your services without thinking it all the way through, you could be underselling or underachieving the goals you’ve set for your company. Not sure where to begin? Start by answering these simple questions and you’ll be well on your way to creating a great pricing strategy that works for you, while you spend your time working with new clients. What are your business goals? Yes, your goal is to grow your business. That’s a good start! But beyond that, what are you trying to achieve in your business right now? Are you attempting to reach a new segment of the market? Increase profit margin? Gain a larger market share? The answer to this question is the first step to determining how to price your services. How does your target market make decisions when it comes to your services? Different segments of the market make buying decisions very differently. As a financial planner, are you trying to reach young, budget-sensitive families, or very wealthy people close to retirement? It’s important to price your services so that your target perceives your value. For example, low-cost promotions and giveaways on premium services can undercut your value and confuse potential customers. How is your competition pricing their services? Chances are, you won’t be the only option your prospects are considering. That’s why it’s important to be prepared with an understanding of your competitors’ pricing so you can explain why your services cost more, or less than theirs. Keep in mind that the more competition you face, the more likely price will be the primary means by which customers make their decision. Based on all of the above, which pricing strategy makes the most sense for your business? Here are a few options to consider… Premium Pricing Is the service you provide especially unique? Is your target market very wealthy? If yes, pricing your services higher than the competition might be right for you. While higher prices = higher profits, keep in mind that premium-priced brands have the added challenge of creating a high-value perception in other ways to justify the higher price. Economy or Market Penetration Pricing Are you trying to steal business away from the competition or attract price-sensitive clients? Pricing your services lower than the competition is the way to go. If your low-price strategy is temporary to penetrate the market, be prepared for the possibility of an initial loss of income while you establish yourself in the market place – and have a plan for increasing your pricing in small increments over time. Also be sure to create the perception of value with other marketing strategies, so customers don’t confuse your low costs with low quality. Psychology Pricing This pricing technique attempts to affect customers on an emotional level before a logical one. Did you know there’s evidence that consumers tend to perceive prices ending in odd numbers as being significantly lower than they really are because they tend to round to a lower number? Some also suggest that removing the comma from a number over $1000 creates the perception of a lower price. There are dozens of psychology pricing strategies that range from how you align your numbers to the words you use next to them. These tools can be very effective, but it would be a mistake to start here before determining the real “why” behind your pricing. Tiered and Bundle Pricing Do you offer basically one service with options that vary in value? Try using a pricing structure that offers “good,” “better,” and “best” options – this can help your customers quickly understand exactly what they can expect from you and has the added benefit of capturing a larger market share by appealing to a wide range of shoppers. Bundle pricing essentially combines services that would cost more on their own then when packaged together. If you have a number of a la carte services apart from your core offering, bundle pricing could be an effective way to create a perception of high-value at a lower cost. Remember, your pricing strategy has a huge impact on your business’s ability to make a profit, but it’s just one piece of the pie. Looking at the overall financial health of your business on a regular basis is just as important. xendoo handles your bookkeeping so you can always be aware of your financial health. [av_sidebar widget_area=’Blog Post Disclaimer’ av_uid=’av-om2w’]
6 Ways to Cut Overhead Costs
Every business has to spend money in order to make money. Here’s how to keep those ongoing expenses from getting too high and impacting your bottom line. Take a fresh look at every single expense. Chances are, some of them have become a habit but can now be either eliminated or achieved in a more cost-effective way. Re-negotiate supplier and vendor contracts. There may be things in there you don’t need anymore. On the other hand, you may find that buying more services from one company costs less than piecemealing it out to several suppliers. Ask for a better deal from existing suppliers. Shop around for more favorably priced suppliers. Allocate more marketing efforts to free or low-cost channels. Word-of-mouth and tell-a-friend promotions to existing clients. Social media campaigns. Strategic partnerships with other local businesses. Employee sales competitions. Testimonials from satisfied clients. Centralize purchasing. One person in the company should handle it all, from office supplies to phone/internet providers to equipment rentals. This person will: Prevent duplications, unexpected shortages, and confusion. Be good at wangling better deals, concessions, and discounts. Shop around for the best offers. Re-think your office space. Do you really need to be leasing so much space? Do you have too much inventory/equipment on hand, taking up storage space? Is there another space available that offers equally good access for current and prospective clients at a lower rate? Control labor costs. Avoid paying overtime by fine-tuning scheduling or converting to part-time employees. Reduce turnover and hiring expenses by maintaining a happy, fulfilling work environment. Cross-train employees to fill more than one role. Prevent time theft with an app that tracks actual hours worked. Solving the overhead problem is all about baby steps. Chip off a bit here, a bit there, and keep a year-round watch on expenses. It will all add up to some nice, healthy profit margins.