The Break-Even Point – What is it, Why does it Matter, and how do you calculate it?
Knowing what your break-even point is, is critical in any business. Whether it’s understanding how many units you need to sell or how much revenue you need to generate, understanding break-even is the difference between success and failure.
What is “Break-even”?
Quite simply, the break-even point is where revenue equals cost. Some businesses measure their break-even point in terms of how many units of sales need to be made in order to equal their costs – others in terms of how much revenue must be generated. Either way, knowing when your products, services or your business as a whole becomes profitable is vital.
So, How do I Calculate my Break-even Point?
Whether you’re looking at a specific product or service, or your business as a whole, there are three key “ingredients” in calculating your break-even point.
These are the underlying costs associated with running your business. Rent, rates, lights, wages and the like.
These are the costs specifically associated with the product or service you are selling. Consider factors such as how much the product costs to manufacture, ship and store.
UNIT SALES PRICE
This, as you may have guessed, is the cost to the customer of one individual unit of product, or one instance of a service.
Once you have these three figures, you can calculate your break-even point using this simple equation:
Let’s take a look at an example to put these numbers into context…
Bob’s Hardware Store is considering adding a new line of ladders to their offering. Demand for ladders seems to be increasing in the area and Bob wonders if the new ladders he’s seen could help boost their profits.
Break-even in Units
Bob calculates his break-even point as follows:
Fixed costs = $2,500 per month
Variable costs of the new line = $20 per ladder
Sales price per ladder = $45
Bob divides his fixed costs ($2,500) by the sales price minus the unit variable costs ($45 – $20 = $25) and arrives at the figure 100. Bob now knows he must sell 100 ladders per month to “break even”.
Break-even in Dollars
To discover his break-even point in Dollars, Bob needs to think in terms of Contribution Margin. That’s the difference between the sell price and the cost to make that product. It is calculated as follows:
The Contribution Margin of Bob’s new ladders is ($45 – $20) / $45 = $0.56.
The equation to calculate the break-even point in Dollars is:
So in Dollar terms, Bob’s break-even point is $2,500 / $0.56 = $4,464. That’s the revenue Bob needs to generate to break even with the new ladders.
Allowing for rounding up and down, we can see that this number compares directly to the 100 ladders @ $45 Bob needs to sell.
Break-even is Key to Your Business
Understanding break-even points allows you to determine whether products and services are contributing to your business’s profits. It helps you determine optimal selling prices and assess how many units of a product or service you need to sell to remain profitable.
Cost Of Goods Sold (COGS) – What Is It And How Do You Calculate It?
In accounting terms, Cost of Goods Sold is simply the cost of an item to a retailer, manufacturer or distributor. COGS is a form of expense, and is recorded in an income statement.
There are two ways to calculate Cost of Goods Sold, which we will look at in this article. First though, let’s look at what COGS is…
Cost of Goods Sold (COGS)
COGS – sometimes also called Cost of Sales – is the term applied to the cost of any goods that are either purchased or manufactured to be sold. COGS have a direct impact on a business’s profits (or losses).
Listed on a business’s income statement, either under the heading of “sales” or “income”, COGS are an important factor in performance.
Tax and COGS
According to the IRS, tax reporting of COGS is an obligation for all businesses that sell products, so that they can write off the expense. Since COGS can be used to reduce tax liability, it is also in a business’s interest to declare.
Any small business with average gross revenues below $25m in the previous 3 years needs to report their COGS, requiring absolute accuracy in order to prove the costs associated with all goods purchased.
As Cost of Goods Sold increases, a business’s profits are reduced; so keeping COGS to a minimum is crucial.
What is Included in Cost of Goods Sold?
A number of elements combine to form Cost of Goods. These include:
- Cost of raw materials
- Cost of any parts used
- Labor costs
- Shipping and transport costs
- Cost of items purchased for resale
- Overheads such as utilities related to production of items to be sold
- Indirect costs, including sales force and distribution
How is COGS Calculated?
As we mentioned earlier, there are two ways to calculate Cost of Goods. Let’s take a look at these methods and how they differ.
The first method to calculate COGS is as follows:
In this formula, “beginning inventory” is the value of inventory and the start of the reporting year (which is in fact calculated at the end of year before). “Cost of goods”, as you may expect, is the cost of all goods purchased or produced through the year. “Ending inventory” is defined as the value of all inventory at the end of the year.
In the second method, any change in inventory is used to adjust the Cost of Goods. Let’s look at an example:
At the start of the year, Bob’s Hardware Store places an order for 100 ladders. By the end of the year, Bob’s inventory has increased by 20 ladders. In this case, the cost of 480 ladders is the Cost of Goods Sold.
Had Bob’s inventory fallen by 30 ladders at the end of the year, then the cost of 130 ladders would be the Cost of Goods Sold.
Other Uses for COGS
When a business wants to determine its inventory turnover (the number of times they sell or replace their inventory in a given period) COGS can be used for this purpose. It is sometimes also used to determine gross margin.
Variable Inventory Cost and COGS
With so many factors involved in determining the Cost of Goods Sold, it’s no surprise that it is not a number that remains static over the course of a year. In order to accurately report COGS, these fluctuations need to be accounted for, and there are three ways to do this:
- First in, first out (FIFO). Goods which arrive or are made first, are sold first
- Last in, first out (LIFO). The most recent goods to arrive or be made are sold first
- Average cost. The average Cost of Goods Sold throughout the reporting period is calculated.
COGS: an Asset or a Liability?
In accounting terms, COGS is neither an asset nor a liability. It is recorded as an expense – an accounting term for the cost of doing business.
As all entries in bookkeeping must balance, an expense is recorded as a credit in the asset (or liability) account, and a debit in the expense account.
How to Select Billing Software as a Freelancer
As a freelancer, your money is made on a per-task or per-job basis. When you’re working on multiple projects at a time it can become confusing when trying to bill clients and structuring payments. What you need is a simple, robust, all-in-one solution that will support your business’ monthly billing requirements. So, let’s take a look at how you can select the right billing software for your small business or side hustle.
What is a day like in the life of a freelancer?
The life of a freelancer can be different depending on each business model. Some set their alarms early and work 12-hours straight, balancing multiple billable clients at a time. Others view freelancing as a side hustle, focusing on one project at a time, managing only one billable client at a given moment. No matter how big or small your workload is, one thing is typically constant: you get to choose both the projects as well as the companies you collaborate with. You also get to choose what billing software and solutions you invest in – probably a bit less fun than your day to day, right? With a team of one, fun or not, it’s very important to find the right option that will make your life easier.
No matter how many projects you’re taking on, you have to get paid for your work. Once you’ve put in the time to finish a project, you then go back and calculate your hours as well as how much you can expect to get paid. Consider purchasing a platform that allows you to track your expenses and time so you’re able to spend less time calculating and more time getting tasks done. This way, you’ll be able to minimize any stress and hassle.
What common challenges do freelancers face?
From the outside it can seem like being a freelancer is a pretty sweet way to make some money. Some people don’t understand the hard work that goes into being a successful freelancer and how much effort goes into managing multiple projects at a time. Here are some of the most common challenges freelancers face:
Managing time effectively:
Time management is something that many individuals find challenging, whether they’re a freelancer or not. It can be tough to know which tasks take priority over others and how much time you should be spending on each given project. Investing in a platform that makes it possible to track the amount of time
spent doing work for clients can ultimately help with effective time management.
Keeping projects organized:
With multiple tasks at hand, some freelancers find it difficult to keep all their tasks organized. They know there are platforms available that will organize project tasks, but it’s hard to make the jump before testing something out first. Plus, time is of the essence. Platforms that allow you to create service tickets
and delegate and manage tasks will make it easier to keep client service requests and tasks organized.
Oftentimes it can be challenging to manage multiple clients at a time. If you didn’t have to worry about which clients sent in their payments
and which didn’t, you’d be able to save a lot of time and energy. Products that allow you to give clients access to view their open invoices will place convenience in the hands of both you and your clients. You should also consider choosing a billing software that allows you to send automatic reminders and charge late fees so you won’t be left in the dark as far as payments are concerned.
Controlling finances: Many freelancers struggle with the inconsistency of finances and some still struggle with finances no matter how much they’re making.
How great would it be to find a solution that allows you to know what your finances will be, and when the payments will go through? When looking for the right invoicing software for freelancers, consider choosing products with capabilities that align with your intentions. Here are 5 top items to consider when choosing a billing software:
Solutions with customizable invoicing
capabilities give you the opportunity to tailor your invoices so that they better represent your personal brand and style. Imagine being able to produce invoices that are both easy to create and scalable. With the right invoicing software, you’d also be able to use invoices to your advantage to bill clients instantly, keeping them on schedule.
Think about how convenient it would be for your billing software to accept different payment types such as credit cards, Paypal, and even ACH and STRIPE all within the click of a button. Plus, as a freelancer, it would definitely be beneficial to choose a software that allows you to send automatic payment
reminders. This way, you’ll be able to get paid faster and reduce any delinquent payment habits.
Finances, sales, expenses, and taxes are equally big parts of your business. It would be wise to think about purchasing a software that provides reports
consisting of real-time stats on all of these important items. This way, you’ll be able to use the reports as a resource and look back on previous analytics. Plus, some solutions may even allow you to share these reports with your clients in real time as well.
Time is of the essence these days, especially as a freelancer or small business owner. Some billing software makes it possible for you to view a clear breakdown of where you’re spending your time each day, with timers embedded into the software functionality. Features like this will make it possible for you to track the time
you spend working so that you can save time and money!
This one is arguably the most important. You’re going to need a billing software that fits your budget. Some software solutions have pricing plans
specifically for freelancers and small business owners. It’s important to know how much you’re willing to spend and what you’re looking to get out of the software so you choose a software that stays within your budget.
Why is an easy billing software right for a freelancer?
Be sure you know what capabilities you want an invoicing software to include. It’s not worth wasting your time on products that contain features you’ll never use. Being mindful of what you plan on using the software for will only set you up for success.
Having the right invoicing software for freelancers is crucial to be able to streamline your payment process, automate billing, and make your life easier. What you need is a simple but robust near all-in-one solution to help you grow your business. With the right invoicing software for freelancers you’ll be able to easily track and support the financial information that matters most to your immediate and future needs such as paying bills, getting invoices sent out, and reporting earnings at year-end.
Does a platform that performs on all levels seem too good to be true? We’re here to assure you that Billwaze is an easy billing software that effectively meets the needs of freelancers. Plus, with an easy set up, no hidden fees, and the ability to cancel at any time, our billing software will change the way you do business, scaling your success.
When you subscribe to Billwaze, you’ll get your first month free with a 100% money back guarantee. Get started today
How To Get Clients To Pay Their Invoices On Time
Curious to know how to get those dreaded invoices paid on time? Not sure how to create easy invoicing processes for your clients and wish there was a simple way to just get the bills paid? Well, we can’t promise any magical solutions, but can provide you with a few ways that are practical, affordable and easy to implement to help get clients to pay their invoices on time.
If you’re like a lot of small business owners, getting clients to pay invoices can be extremely difficult – and it’s not necessarily because they are delinquent and won’t pay. There are many challenges that every organization faces that prevent them from being efficient or on time with paying their bills. So let’s start this article out with a few key considerations for why clients don’t pay their invoices on time and a few tips for how to make the billing process easier. Ready?
Typical reasons why clients don’t pay their invoices on time
In most cases, the reason why clients don’t pay their invoices on time has nothing to do with you or your business on a personal level. If you think that Mary Sue just isn’t happy with your personality and that’s why she’s not paying her bills on time, we (almost) guarantee that’s not the case. Business, as you’re most likely aware, is extremely complex – on many levels. The challenges that your company faces are most likely very similar to the challenges your clients also face. Here are a few key reason why clients don’t pay their invoices on time:
Missing Invoices – You know that you emailed your invoice to Chad last week and he’s on Net 7, but here we are and – zip – no money has been sent. Well, according to research, this is a common occurrence because many clients lose or misplace their invoices. Email can be challenging to manage and simply sending a link via Outlook or Gmail can easily slip between the cracks.
Wrong Sender – They’re moving quickly and appreciate your services, but yikes – they’ve sent you the wrong email for the person responsible for paying their bills on time. And, Sandra happened to be out last Thursday for an unexpected surgery (which also wasn’t communicated to you) and now she’s under water for days on top of never having received your invoice.
Subjective Terms – You’ve sent the invoice for services, but the client still isn’t clear on what a certain clause is within your managed services agreement (MSA), so they’re unable to process the payment until they’ve received clarification. Until that gets figured out, your invoice has been added to their pile of problems that they’re going to avoid for a bit and most assuredly until they grab that cup of coffee to help them finish out their day.
We’ve only listed three reasons here, but do any of these ring a bell or sound reasonable? The list goes on and as you continue to try to grow your bottom line, it may be wise to begin to think about how to get clients to pay their invoices on time.
How to get clients to pay their invoices on time
If you’re like many businesses or freelancers, billing is a major pain. Not only do you struggle with getting clients to pay their invoices on time, but you also wonder what you can really do with your limited capacity to make the process of doing business easier. And, in a full confession, that’s why we’ve written this blog – we want to help you grow your business by doing exactly that. So here are a few recommendations to help you get clients to pay their invoices on time and make your day even brighter than it was yesterday.
Make your invoices and billing process automated
– ‘Say what? I can do this?’ Yes, with Billwaze
you most certainly can. And it doesn’t matter what size your company is, a billing management platform like Billwaze can take you out of spreadsheet and manual billing-hell and help you save hours of time and a few major headaches by automating your invoices. Connect your invoicing to time tracking and other parts of your business as well to make things even more efficient.
Align your billing system into one, fluid process
– Many times when you’re working with multiple systems or processes you have to use different platforms and mechanisms to get the job done. How exhausting, right? Why not align your existing business systems with a program that integrates with over 1500 platforms
and makes your billing one, fluid process? This will help make sure that clients have everything they need (automated or manual) and are communicated with properly to support helping you get those invoices paid on time.
Provide your clients with a single source of billing truth
– Does that single spreadsheet or PDF invoice show clients their payment history, open invoices or other pertinent information pertaining to their account with you? We know that spreadsheets have a lot of functionality
, but guarantee that they don’t provide a custom portal that clients can securely access to help them pay their invoices on time. With Billwaze, you can provide custom access to clients who struggle with keeping everything together by offering them a single location to help manage their billing.
Get a free trial of Billwaze and help get clients to pay their invoices on time
For less than what you pay for a night out to dinner with a friend in one evening, you can optimize your billing process for every client you work with for an entire month. Right now, we challenge you to start a free, 14-day free trial of our software and guarantee that it will make the process of how you do business easier by optimizing your billing processes and helping streamline the process of getting your clients to pay their invoices on time.
Tips for managing your time and increasing productivity as a freelancer
Managing your time and increasing productivity as a freelancer, especially when it comes to invoicing, can be a huge challenge. You already feel overwhelmed trying to do right by your clients, booking appointments and getting more business. Who has to the time to do more? While you maybe overworked juggling so many balls at the same time, the good news is that there is light at the end of the tunnel. Here are three tips for managing your time and increasing your productivity:
Tip #1: Set goals
First and foremost, it’s important to set clear goals and priorities for yourself when it comes to invoicing. This means identifying the most important tasks such as sending out invoices on time, following up with late paying clients, as well as giving a way for your clients to pay you online. To help you with this, try using a tool like BILLWAZE. Amongst other things, it will help you get rid of all the noise that comes with managing your business, – as well as automate the entire invoicing process, so you can keep track of your billing and payments.
Tip #2: Set boundries
Another key strategy for managing your time as a freelancer is to set boundaries for yourself when it comes to invoicing. This means setting specific deadlines for sending out invoices and following up with clients. This however can drain you as well as it takes good effort and time knowing which client to bill and when, know who owes you money and following up with them at the right time. The great thing is that you literally can use a tool to automate all this pain and get your sanity back in order. By doing so you will free up your time and hence be more productive—and maybe even less stressed!
Tip #3: Stay motivated
Finally, it’s important to stay motivated and engaged with your work, even when you’re feeling uninspired. One way to do this is to set small, achievable goals for yourself and celebrate when you reach them. This could be as simple as finishing a specific task or project, or hitting a certain milestone in your business.
Overall, managing your time and increasing productivity as a freelancer is all about finding the right strategies and tools that work for you. By setting clear goals, streamlining the process, and staying motivated, you can make the most of your time and build a successful and rewarding career as a freelancer.
Better productivity and profitability with BILLWAZE
Remove all the hassle and noise that comes with running a successful small business and increase your bottom line in seconds. By using the right tool, you can streamline and automate most of the tasks you do now manually, saving you time, allowing you to focus more on your work, and most importantly even getting paid faster! BILLWAZE, an all-in-one complete platform, is an integrated billing and cost management solution your business needs to grow and thrive. Claim your free 14-day trial today!
Why Time Tracking Could Be Costing You Money
Time and resource management are crucial business fundamentals, not only from a functional point of view, but also from a financial perspective. For entrepreneurs and owners of small businesses, knowing how much their time is worth and how much time each task consumes is critical. However, could inefficient time tracking strategies themselves be costing you money, and how can you avoid this situation?
Why time tracking matters for small businesses
For service businesses, time tracking is directly linked to profitability. When you track how many hours you or your staff members spend on a task, you get a clear picture of costs and overheads – and also, where efficiency savings can be made and productivity increased. With this information, you can determine the real cost of your work, compare it to your fees, and see whether you’re generating income, breaking even, or losing money.
Accurate time tracking also provides crucial business intelligence when making targeted investment decisions – such as whether to invest in automation – and the ROI you should expect from your expenditure.
So, what could go wrong with time tracking?
When it comes to multi-level services involving various team members, departments, and contractors – as is typical in an IT Managed Service Provider (MSP) business model – time tracking is not always straightforward. Without a centralized data repository, it is easy to underestimate costs or overestimate your profit margin, leading to inaccuracies that undermine your pricing strategy.
Furthermore, without an accurate picture of how much time is being spent and on which tasks, you could be getting your investment priorities wrong. For example, you could be spending money on automating the most time-consuming tasks even if they’re low value, reducing your ability to invest in tasks that yield more valuable returns.
Better resource allocation
Using a unified service delivery, time tracking, and billing software platform, such as BILLWAZE, can expose patterns of wastage, inefficiencies, and pinch points that reduce the value of your time. Let’s take IT consulting projects as an example. A solution that offers complete time tracking for software developers can show how much time is going into research, client communication, project management, and invoicing – with a full breakdown of related costs and a clear roadmap for efficiency and productivity improvements.
If any of these areas require disproportionately more time than expected, or if the time used to handle those tasks is increasing, this could be a sign that you need to review your processes and workflows or allocate more resources to high-demand tasks. This could also signal that staff don’t have the knowledge or tools needed to their job efficiently, which could be addressed with more training.
Sets the basis for growth
Lacking an efficiency-focused time tracking solution could also affect the long-term success of your business. Without accurate and relevant time/cost management insights, it may be difficult to forecast sales demand and to commit sufficient resources to growth and investment. It is also possible to underestimate your time capacity and human resources, leading to missed sales opportunities.
Meaningful time tracking helps you understand if your work is profitable, or if you’re falling short of the margins you could be achieving with your time. If the numbers don’t add up, time tracking insights can be used to adjust your pricing and resource allocation based on real costs and actual time frames.
With those insights, you can implement a more profitable pricing structure, whether that means by the hour, per project, or value-based pricing. Not only that, but some solutions feature time tracking software for billing, too, so you can automatically turn billable services into invoices – cutting the length of your invoice cycle and improving your cash flow.
Better cost control and profitability with BILLWAZE
Getting time tracking right and doing so from the start can provide a solid foundation for freelancers or small business and pave the road for growth. The BILLWAZE timer will keep track of all the time spent working on your clients, and automatically bill that time into your invoices. Get in touch to find out more – BILLWAZE is more than just a time tracking tool, it’s a complete platform that simplifies invoicing and managing your business.
How To Set And Negotiate Rates With Clients
As a freelancer, setting and negotiating rates with clients can be one of the most challenging aspects of running your own business. However, with the right approach, you can ensure that you are getting paid what you’re worth while also building long-lasting relationships with your clients.
1. Research the market:
Before you set your rates, it’s important to research what other freelancers in your field are charging. This will give you a better idea of what is considered a fair and competitive rate.
2. Determine your value:
Once you have a sense of what others are charging, you need to determine your own value. Consider your skills, experience, and the value you can bring to the client.
3. Communicate your value:
When negotiating rates with clients, it’s important to communicate your value and how it aligns with their needs. Be prepared to discuss your qualifications and how they align with the project or job.
4. Be flexible:
While it’s important to know your worth and communicate it to clients, it’s also important to be flexible. Be open to negotiation and be prepared to make compromises if necessary.
5. Set clear expectations:
Before starting any project, make sure you and your client have clear expectations of what will be delivered and when. This will help avoid any confusion or misunderstandings about the scope of the project and the rate you’ve agreed upon.
6. Get everything in writing:
Always make sure to get any agreements about rates, payment terms, and timelines in writing. This will help avoid any confusion or disputes down the road.
In conclusion, setting and negotiating rates with clients can be challenging, but with the right approach, you can ensure that you are getting paid what you’re worth, – while also building long-lasting relationships with your clients. It’s essential to research the market, determine your value, communicate your value and be flexible, set clear expectations and get everything in writing.
Better cost control and profitability with BILLWAZE
Remove all the hassle and noise that comes with running a successful small business and increase your bottom line in seconds by investing in a platform that automates everything from expense and time tracking to payments, and even reporting. BILLWAZE, an all-in-one complete platform, is an integrated billing and cost management solution your business needs to grow and thrive. Claim your free 14-day trial today!
How To Calculate Straight Line Depreciation
The moment you purchase something, its value begins to decrease. In accounting terms this is called depreciation, and it is crucial in determining the value of your business’s assets.
Straight Line depreciation is the most common form of calculating the depreciation of an asset’s value over the course of its life. Very simply, each accounting year the asset is depreciated by the same fixed percentage.
Straight line depreciation offers several advantages over other methods of calculation. Its simplicity means that errors are far less likely, and it does away with the need to monitor patterns in the consumption of the asset.
How is Straight Line Depreciation Calculated?
There are three factors used to calculate straight line depreciation:
● Purchase cost of the asset
● Salvage value of the asset if applicable
● Lifetime of the asset
The purchase cost is simply what was paid for the asset. The salvage value is an estimate of the resell price once the asset has reached the end of its useful life.
Straight line depreciation is calculated by dividing the lifetime of the asset into 1 to determine the depreciation rate, and then multiplying that rate by the purchase cost minus the salvage value if there is one.
Let’s put this calculation into an example:
Knowing how messy DIY can get, Bob’s Hardware Store stocks a range of multi-purpose cleaners. Each box costs Bob $11, and has a shelf life of 2 years. Even though Bob will need to take unsold boxes out of his inventory after that time, he knows that he can sell them at the local market for $5 each.
Bob calculates the straight line depreciation as follows:
Useful life 2 years, divided into 1 = 0.5. This is the depreciation rate per year.
Asset cost (purchase price minus salvage rate) is $11 – $5 = $6.
Straight line depreciation is depreciation rate 0.5, multiplied by asset cost $6 = $3. Each box of cleaning fluid has a straight line depreciation of $3 per year.
How does Straight Line Depreciation Appear in Accounting?
For the purposes of accounting, straight line depreciation is shown as a credit to the accumulated depreciation account, and a debit to the depreciation expense account.
Estimating IT Maintenance Job in 7 Easy Steps
Even for the experienced, estimating a new IT maintenance job can be difficult. You want to make a healthy profit; but you don’t want to price yourself out of the running.
We’ve created this simple 7 step guide to pricing IT maintenance jobs to help you stay both competitive and profitable!
Step 1 – On Site Visit
Don’t just take the customer’s word for the work that needs to be done! Visit the site for yourself to see exactly what’s required. How old the hardware is, what software is being run, how it’s being used and how it’s currently being maintained, and even how tech-savvy the users are can all influence the rate you’ll need to charge… And if there’s a lot of on-site support required, you’ll want to factor in travel costs and time, too.
Step 2 – Estimate the Workload
Now that you know exactly what needs to be maintained you can start to work out how much time and resources the project will require from you.
As well as your own time and expertise (or that of anyone on your team who will be delivering support) you’ll want to consider factors such as whether you’ll need to
keep spare hardware on hand for emergencies.
Step 3 – Estimate the Cost of Delivery
With all the time and resource details nailed down, you can apply your pricing model to determine what it will cost you to deliver the level of support and maintenance required.
The cost of your labor, your time, and other expenses like travel and hardware supplies should all be factored into your final cost estimate.
Step 4 – Include Your Marketing Costs
Remember that actually delivering the IT maintenance service is only part of your cost of doing business. If you had to spend money on marketing and advertising to generate the lead, then that’s a cost you’ll want to factor into your estimate.
Step 5 – Leave Room for Profit!
There are a number of factors that will determine what profit markup you add to your estimate. How established your business is, what reputation you have in the market, how many other businesses are competing for the job.
Ideally, you’ll want to allow at least a 20-30% markup to ensure you remain profitable, even if you occur a few unforeseen costs here and there.
Step 6 – Make Your Final Calculation
The total of all your costs, plus your markup, will give you the final price you put to the customer.
Step 7 – Make It Specific!
A monthly price of exactly $800 looks “made up”. Potential clients will assume you’ve rounded your price up. A monthly cost of $812.67 looks like you’ve calculated exactly what the job will price. It’s a small detail, but it can make a difference!
Understanding Balance Sheets
When you want to know the financial position of your business at a specific point in time, a balance sheet is the document you need.
A balance sheet is a record of a business’s assets, liabilities and its shareholders’ equity on a given day. It’s a top-level view of the total amount your business owns, and what it owes. It also shows how much is invested by the owners.
What does a Balance Sheet Show?
A balance sheet comprises elements which can be used to determine the financial position of a business: its shareholder equity, liability and assets. It comprises these key elements:
Current assets are those that can be converted to cash within a year. On the balance sheet they are subdivided into:
- Cash and cash equivalents. The most liquid form of assets, this includes checking and savings account balances, currency, and checks
- Accounts receivable. The balance owed to a business by its clients for products and services (due for payment in the short term)
- Inventory. This includes both raw materials and finished products for businesses that make or sell items.
- Prepaid expenses. These are items paid in advance, such as insurances and rent.
Long term assets, as you might expect, are those assets which will not be converted to cash within a year, These are further divided into:
- Fixed assets. Property and buildings, hardware such as computers, and machinery are all forms of fixed asset.
- Long term securities. This describes investments which cannot be liquidised within a year.
- Intangible assets. These non-physical assets such as intellectual property, copyrights, patents and franchise agreements.
After assets on the balance sheet, come liabilities. This is a record of the debts your business owes to others, such as loan repayments and other recurring expenses. Just like assets, liabilities are subdivided into:
Current liabilities. These include things like:
- Interest payments
- Rent and utilities
Long term liabilities, comprised of:
- Pension fund liabilities
- Deferred income taxes
- Long term loans
Shareholder equity is the value of a business’s total assets minus their total liabilities. It is the amount of money generated by the business, plus any money invested by the owners or shareholders and all donated capital.
How do I Balance a Balance Sheet?
Just like other aspects of bookkeeping, your balance sheet must balance.
The two “sides” of your balance sheet represent the total value of all your assets, and the total value of all your liabilities and shareholder equity. One side must always be equal to the other.
What is the Importance of a Balance Sheet?
On its own, a balance sheet gives an overview of the financial status of your business on a given day. When looked at along with other financial statements it also helps to understand the relationship between different accounts.
The following information can be derived from a balance sheet:
A comparison of your income statement and your balance sheet will give you insights into how efficiently your assets are being used, and how your assets are used to create income.
Leverage describes how your business is positioned with regards to financial risk. Comparing your total debt to your total equity will help you see how much risk your business faces.
Liquidity, or how much cash you have on hand, is vital in understanding whether you can meet your current financial obligations. Ensuring that your assets exceed your liabilities means that your business is in a healthy position with regards to these debts.
Looking at a Balance Sheet
Here’s an example of a balance sheet as it would look in real life:
Understanding Balance Sheets
You can clearly see how the assets on one side, and the liabilities and shareholder equity on the other, balance each other out exactly.
The Four Key Financial Statements
Understanding the exact financial status of a business is a complex affair, and cannot be done with one report alone. To gain an accurate picture of the health of a business, four main statements are combined. These are:
As we have seen in this article, the balance sheet details the relationship between a business’s total assets and total liabilities, plus shareholder equity. It reveals important data such as the business’s liquidity and is used to derive the theoretical monetary value of the business.
CASH FLOW STATEMENT
The cash flow statement is where a business records money coming into and out of a business over a defined period of time.
STATEMENT OF RETAINED EARNINGS
In this report you will find details of the changes in a business’s equity over a period of time. It details things such as the sale and repurchase of stock, dividend payments and changes derived from the reporting of profits and losses.
Considered the most important statement, as the income statement is where a business’s generated profits are found. The statement covers revenues, expenses and profits/losses over a defined period of time.