Understanding Profit & Loss Statements: Margins
Remember when I took you through a P&L statement here? If you don’t, then quickly freshen up on that last blog post.
OK - you’re back now! Awesome!
I love reviewing past data to find patterns and averages in my business financials, to find better ways to position yourself financially. My hope is that some of the tips below help you to view your business like the CEO and CFO that you need to be!
First off, do you cave when a client balks at your prices? Then read on, I promise there are helpful tips (and a resource) to match your struggles!
Today we're going to add to the reading your Profit & Loss (P/L) Statement lesson for some tips related to your pricing metrics. As a refresher, here is my fake Profit & Loss Statement below.
#1 - Direct expense to income ratio
This will show you the average direct costs/event. BOOM. Now you instantly know (about) how much you'll spend on flowers and supplies!
FORMULA: (Gross Revenue - Gross Profit) / Gross Revenue
Current Year = (10,000 - 7,650) / 10,000 = 23.5%
Last Year = (5,000 - 3,200) / 5,000 = 36%
Score, you can see we were better at controlling our direct expenses this year. The lower the %% the less you’re spending overall!
#2 - Net Profit to Gross Revenue ratio
How much money (after taxes) are we estimated to make on each event?
FORMULA: Net Profit / Gross Revenue
Current Year = 3,150 / 10,000 = 31.5%
Last Year = 420 / 5,000 = 8.4%
Sweet, now you can loosely estimate how much will be your true profit after taxes. For business owners who aren't taking a paycheck regularly, this can help you loosely predict what to pay yourself while still keeping your estimated tax bill in your business savings account.
So, for my P&L statement, you can see for every $100 we bring in the business, approximately $31.50 of that $100 is our profit after taxes.
#3 - And finally, let’s see what one event is estimated to bring to your bottom line:
Your Estimated Profit from the Event = The amount of gross revenue you're bringing in for an event x the net profit to gross revenue ratio
Your Estimated Hourly Rate = Your estimated profit from the event / the number of hours you’re working (includes all hours like: communicating, prepping, producing, breaking down, etc)
How does the estimated hourly rate make you feel? Good, bad, icky? Use that knowledge…. in no way should I expect a business owner to be at or below minimum wage. If you are, then it’s time to reframe your process + educate your client, raise your prices, and/or consider turning down something that is going to be more harm than good in your business if it’s on a long timeline!
Your generated hourly earned rate is one of the most helpful aspects in pricing. It means when a client balks at your prices you can confidently respond because you know your numbers and process better than anyone else!
Isn't that awesome and pretty dang easy? As a wise friend says, "it all comes out in the wash" so some events will be higher and others will be lower as you experience growing pains.
Looking for more business metrics that I use in my own business? Then click the link below to access those metrics that you can use today!!
Ready to learn more for free?
Brooke Olsen Consulting is a pricing and business strategist team. We specialize in pricing + profitability, financial education and business strategy for creative business owners and entrepreneurs just like you!
Get access to our only freebie available to the public, “THE TOP 5 THINGS TO CONSIDER WHEN PRICING YOUR BUSINESS SERVICES“, at the link below!