Profit is one of those loaded words that can mean so many different things. In my experience with women entrepreneurs, it is rarely the first goal (or even on the radar) for the owner when they first start out. There are so many other things to figure out and handle! Trying to get a product or service up and running, finding customers, documenting sales and expenses and juggling paperwork can seem overwhelming enough without trying to grasp something that seems like a long-distant possibility.
Maybe it helps to look at what a profit isn’t: it isn’t something that has to take a long time to achieve; it isn’t something that is hard to figure out; and it isn’t something that you can avoid in a business and still hope to succeed — even at a modest level. Patti Dowse of Erda Leather, a successful Maine business that started in 1971 said, “If you don’t master the numbers part, you don’t get to do this business!”
The IRS describes a profit as the amount of money that is left after you subtract the business expenses from the business income or sales. It can also be expressed as the money available after business expenses that the owner can either take home as an owner’s draw (salary) or reinvest back in the business so the business can grow. It is the owner’s “reward” for all their hard work. It is the cushion that allows for new inventory, more employees or sales opportunities. It is the way to ensure that the business is an asset that has value. It enables the owner — and the business — to survive economically and contribute to the well-being of a community.
Given all these benefits of building in a profit, it is really important to plan for it from the very beginning. For most businesses, especially service businesses, this can be a straightforward calculation. It starts with figuring out ALL (don’t fudge) the business costs. This includes all the things the business has to buy or the bills it has to pay. Added to the business costs is the goal the owner has for the “draw” they need to take home in order to cover necessary personal expenses. In some instances, the business is expected to cover all the family’s expenses while others may contribute only partially to the family budget.
The key to achieving enough revenue to make a profit is the price and the volume of sales. Here is where so many new entrepreneurs stumble. They undercharge for their service or product. Or they have unrealistic goals for the number of billable hours or items they can sell. They may hesitate to do the needed research on what their competitors charge or they may offer too many discounts. It may take some experimenting before the “right” price is found. It’s that very “sweet spot” amount between what the customers are willing to pay (not too high) and all the costs of the business (not too low). For help in working through a break-even analysis see http://www.mainebusinessworks.org/micro/index.cfm/spKey/home.break_even.html.
In Patti’s experience, she started out by just charging enough to cover her business costs with a little money left to pay herself.
“I wanted to keep my price low enough so that folks who weren’t rich could still buy it. Someone finally asked me, ‘Do you want them to buy because the product is good or because the product is cheap?’” she recalled.
Patti realized that to get to high-end trade shows in New York or Philadelphia, project an image of the true quality of her product and hire people to help produce her product, she would need to raise her prices.
“When I raise prices, I still shudder,” she said. “I think folks won’t buy at the higher price, but often they don’t notice.“
Patti also works hard to have a variety of products at different price points in order to appeal to a broader range of customers.
Perhaps best of all, Patti said that finding the right price, setting realistic sales volume goals and knowing how to read the numbers “has given me a feeling of mastery. I can really see how the business is doing.”
Wendy Rose is a senior microenterprise coordinator for Women, Work, and Community based in Augusta serving clients in Kennebec and Somerset counties.