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We have covered how to create pricing, including your labor cost, cost of goods sold, cost of services sold, business expenses markup, and profit markup. Today, we will cover how to manage and pay labor costs when you can’t add it into your price or include a markup.
There are business owners that do not have control over their pricing, and they work with predetermined prices in their business. The market determines prices for most products and services for all business owners. A business owner would not want to have an unreasonably high price or even a nonfunctioning low price. Getting the right range for a business is essential to profit because it will impact revenue (income) and profit.
I have dealt with the fear of asking for what I thought was a high price in the past, but after I looked at what I needed to earn, I realize I was operating off of feelings, and I know many business owners that have also struggled with asking for what we must earn. Sadly, many believe earning a profit is greedy. However, you must have a profit to continue in business. Only shooting for breakeven, in the beginning, is good, but eventually, you must get the courage to reach for more.
Your revenue and pricing will determine if you can pay your labor cost. If you have a preset price and can not add labor, you will have to calculate the number of services or products you will need to sell to reach your cost and profit goals (commonly called sales goals). Instead of this business owner having a set salary, the business owner will pay themselves using a percentage method or splits.
The business owner would distribute the money among the business areas using the business percentages. If the business owner earned $12,000.00 for the month and the COSS, COGS, and labor costs are $6000.00 the business owner would pay their employees and contractors and next distribute $6000 between owners pay, business expenses, and profit. Would you like to learn more? Learn how to manage owners pay for your business? Join the monthly Ask the Accountant Membership or schedule and pay for your own private consultation.
Author: Y. Michelle Coard, President, and Accountant
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