When running a business as a solopreneur, chances are you have a passion for what you do, and you’re an expert in the products or services you offer. But if you want to run a successful business that provides you with an income that allows you to create a life of freedom, you have to learn what it takes to be profitable.
All too often, self-employed professionals — even those who have been in business for some time — don’t know how much it costs to run their business relative to how much revenue they generate.
When I work with clients as a financial advisor, I don’t just cover personal finances; we dive into business finances as well. It’s as important to understand your profitability as it is to understand how to promote and fulfill your products and services.
Five Steps to Make Your Business More Profitable
To help you better understand how to make your business more profitable, I’m going to walk you through a story about my client, Lloyd. I’ve changed his name to protect his privacy, but he’s an actual client that came to me because he was confused, unsure of his profitability, and embarrassed that he did not understand. He knew there was a better way; he just didn’t know what to do. So this is what we did.
To complete these exercises for your own business, you can download a worksheet I created here.
Step 1 – Expenses
I asked Lloyd to pull together some items to help get a better understanding of his situation and his business. He brought in his last two years’ tax returns and his profit and loss statement from Quickbooks. We started with his total expenses. Because I like to keep things simple, we used his total expenses for the prior year. Those expenses were $240,000, which included his pay, payroll taxes, health insurance, software, etc.
Once we knew his total expenses, we could calculate his cost per client or cost per customer. Lloyd has 300 clients, making the calculation easy: $240,000 ÷ 300 = $800 cost per client per year.
Step 2 – Revenues
Next, Lloyd needed to better understand his revenues. He knew his total revenues were $360,000, but we needed to figure out his revenue per client. We took $360,000 and divided it by his 300 clients and found that he had $1,200 in revenue per client. That’s ‘pretty not bad,’ as my old buddy from college used to say.
Step 3 – Analyze
We were starting to get a clear picture of his financials, but knowing the numbers isn’t enough. You need to go deeper to figure out what’s really happening in your business.
Doing some quick math in your head would lead you to think Lloyd is working with a 50% profit. It costs him $800 to make $1,200 — the difference being $400 or a 50% profit margin. The correct way to figure out your profit margin is by starting with your net income, total revenues minus total expenses, then dividing your net income by the total revenues.
So, in our example, Lloyd had $120,000 in net revenues and divided that by his total revenues of $360,000, which equals a 33% profit margin — which, as a rule of thumb, is a good target to shoot for.
In pricing of your services, you should factor one-third to overhead such as software and other fixed expenses, one-third to payroll, including your pay and any outsourcing you do, and one-third to profit. When you work out of your home, these numbers are going to be skewed towards less overhead (fixed expenses) which may be closer to 15% to 20%.
Lloyd now knew his profitability and his numbers. So it was time to tie this newfound information to his goals. He wanted to make more money and create a better life for his family. We talked about the good, the bad, what he can control, and what changes he could make.
Lloyd was decidedly in the good position of running a profitable business. If he stays on track, he doesn’t have to shut the doors or go to work for someone else. But the bad news is that not all clients are billing at $1,200 per year. Some are even under $800 per year, which is less than what it costs to take care of him.
Step 4 – Building a Plan
To build a plan, we needed to start with what Lloyd could control and determine the easiest place to effect change.
Something I have learned over the years is that when making changes, it’s best to start with the low hanging fruit and work from there. Lloyd’s most obvious place to effect change was to raise his prices on his unprofitable clients first. Next, he just needed to decide how.
Step 5 – Execute the Plan
Armed with information, Lloyd was empowered to look at his business differently and make a mindset shift to one of providing value and charging his clients appropriately for it. He drafted a letter to his unprofitable clients and sent it out; most of them were just fine with the increase.
With Lloyd’s newfound business revenues, he was able to plan the family vacation that he had wanted to take for years.
Conclusion
If you are feeling confused or maybe a bit embarrassed by your knowledge of how your business is doing, then set aside some time to walk through each of the five steps. Start by figuring out what your revenues and expenses are. Make sure you understand your revenues and costs per client. Then analyze your situation carefully, build a plan to improve your situation, and execute the plan. Only then can you create the freedom to build the life you want.
If you need help mastering your finances so that you can create the freedom to build the life you want, you can email me at ga**@ga*****************.com or schedule a consultation appointment.
P.S. In June 2020, I was invited as a guest on Live with Bottleneck hosted by Jamie Jay, CEO of Bottleneck Virtual Assistants. In this episode of his show, I shared with him and listeners the 5 steps to building a more profitable business. Although my steps remain the same, there may be more takeaways or a different approach that you might find helpful. You can watch it here.
CREATING A LIFE OF FREEDOM AS A SOLOPRENEUR STARTS WITH KNOWING YOUR NUMBERS.
Profitability is the key to growing and running a successful and sustainable business.
Learn how to calculate the profit you are already generating in your business and discover exactly what it takes to make your business even more profitable in 5 simple steps today.
Request your complimentary worksheet here.
Gabe Nelson, CFP®, is the principal and founder Gabe Nelson Financial, Inc. (GNF) is a Registered Investment Advisory firm based in Sioux Falls, SD. GNF offers fee-based financial planning and investment advisory services to solopreneurs and self-employed professionals. Clients receive personal attention from a financial planner dedicated to helping them reach short and long term financial goals with specialized insight into the particular challenges and opportunities that arise in entrepreneurship. Gabe can be reached at 605.553.9180, via email at ga**@ga*****************.com, or on the web at gabenelsonfinancial.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
