Cashflow 101, Part 3: You're Undercharging and You Don't Even Know It

Next we are going to talk about how much it actually costs to make your product or provide your service.

When you are first starting up you have to guess at some of these costs, but as you have more date (more expense and a better understanding of how long it takes to complete work) you can fine tune your costs.

Here are some of the things that you may have forgotten to include when you came up with what your product or service should cost

1. Taxes you will owe on your profit

2. Taking a client out to lunch

3. Buying lunch for your team so they could work through a deadline

4. Legal bills that may unexpectedly come up

5. Annual renewals, like memberships

6. Interest payments on your credit cards, annual fees on your credit cards

7. The subscription cost of a piece of software you use everyday so it slipped your mind, like Dropbox, Microsoft, ChatGPT, QuickBooks, or your CRM

8. The cost of having your crew go back in to fix a past problem on a project

9. The cost to send out packages

10. Banking fees for your bank accounts

11. Staples or paper clips or printer paper and toner

12. Rent cost of extra space, temporary storage or equipment

13. Insurance

14. Oil change for your truck and new wiper blades

15. Your email account

Are you starting to get the idea? When we sit down to figure out our projected profits, we do a back of the napkin kind of math. The kind of math we all did when we dreamed up our idea for our business. It’s time to starting getting more granular, because no cost is too small when it comes to being profitable.

Using our example of Bob making barrels, Bob makes a hundred and fifty dollars on his product and it costs $100 for the supplies to make the barrel and $50 to have Sam help build the barrels, so he makes $150 for each barrel he sells. But is that really what he makes?

When we look at our profit like this its no wonder we are caught off guard at the end of the month when there’s no money left, we didn’t take enough time to really consider what it costs to make something? Because every penny you spend in your business is going to get subtracted from that $150, including the things you didn’t or couldn’t have foreseen.

This is why your competitor’s price is not a good indicator of what you should charge. You can’t take for granted that he knows his true cost of creating his product, he could be bleeding money every month.

Also his business is different, even if you are doing the same work, he might use different software or have lower rent than you or own his equipment while you need to lease yours.

I know this is work, and a bummer to think about, and it may discourage some of you, make you want to throw your hands up in the air and forget about being a business owner. If it’s too much then that’s great, really.  I’d rather you didn’t start the business and didn’t lose the money in the first place.

What I am trying to say is that every business has this problem, and if your competitor is offering a low price, one that doesn’t cover his costs he will soon be out of business and you  won’t have to worry about him.

Your product costs what it costs, you need to start with the truth. If you cannot sell your product at a price where you turn a profit, than you do not have a sustainable business model. It’s better you know that now.