Financially Support Your Business Without Debt Part 1
"Most business owners need some investment to get the business started in the beginning. You will need to reinvest back into the business and use other funding, but at some point, the company needs to grow and begin to support itself and the owners." - Y. Michelle Coard
Over the last two months, I broke down payroll and how to determine your labor charges or cost of services sold.
Cost of services sold includes your labor and any materials (such as applications, certifications, training, tools) you would need to provide the service. Cost of Goods sold includes your materials to make the product plus labor cost. Many business owners only price at what they want to earn per hour (the labor rate.) If you only price at your labor rate, you will not make enough to cover other expenses.
In accounting, there are many pieces and terms to break down spending and income into particular categories. However, we will focus on the main categories. Today let’s talk about overhead. Overhead cost is the cost that isn’t directly related to producing your product or service.
The overhead cost would include; professional fees, advertising, insurance, interest, labor (not related to performing the service sold), repairs, supplies, website expenses, overall income taxes or other taxes, telephone, utilities, office, business management software, training, mentors, coaches, consultants, etc.
If your pricing only includes your labor cost, you must prepare to receive less than what you need to earn on the personal side because your overhead cost supports the business as a whole. Refer to my payroll blogs if you have any questions regarding your pay rate. Overhead is part of the business markup expenses and add up with each sale. Many business owners do not pay themselves so they can reinvest earnings back into the business, yet their pricing is still not enough to avoid using personal funds.
Most business owners need some investment to get the business started in the beginning. You will need to reinvest back into the business and use other funding, but at some point, the company needs to grow and begin to support itself and the owners. You can only reach this goal when you earn enough money from sales. If a business owner needs to make $1500 a month in salary but only earns $1505 a month, the business owner only covers labor. What about other expenses?