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The Bureau of Labor Statistics shows dramatic price increases from a year ago. Gasoline is up 27.4%, Electricity is up 3.8%, Postage is up 12.8%, Ground coffee is up 4.8%. Ground beef is up 9.6%.
These increases don’t include rising insurance and other business costs. As a result, your employees feel “pinched” because their paychecks don’t go as far.
They, too, want raises.
Instead of “I’ll just raise prices X% thinking, here’s how to really increase pricing as a result of increasing costs.
Let's take the example of an accountant who bills by the hour or an HVAC, plumbing service company, etc. who generates revenue through billable hours.
Simple example – insurance cost:
Assume that your insurance is increasing by $10,000 next year. If your company has 5,000 billable hours, that means your overhead cost will increase by $2/hr.
Simple example – raises for field/direct cost employees
Assume you give all field/direct cost employees a 5% raise to cover the increasing cost of inflation which is averaging 3.4% at the moment. Labor costs need to go up 6.5% to cover the cost of additional payroll taxes, worker’s compensation, and other employee benefits. This assumes that your benefits are 30% of wages.
Simple example – raises for office employees
You are increasing all overhead salaries by $15,000 total. Assuming a 30% employee benefits, then the raise will be $19,500. Assuming the same 5,000 billable hours as above, the overhead cost will increase $3.90.
New pricing for a job/project
Assuming you have all three scenarios above, then, if you are estimating a job that will take 16 hours, then you need to add 6.5% to the cost of labor and $5.90 to your overhead cost per hour (total of $94.40 – 16X5.90) to your overhead cost).
If you feel that you can’t do this – are you willing to take less profit for each job you win?
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How to analyze your financial statements in less than 10 minutes a month
Your bookkeeper can enter the data (although I prefer that you do it) into the Financially Fit Business software (www.financiallyfit.business). Click a button and you see the trends. If your financial trends are going the wrong way, you can and should take actions to reverse the trends. The help part of the software gives you suggested places to look. Or, we can review them with you.
Click here to schedule a time (takes about 10 minutes)
Reviewing timely, accurate financial statements helps you spot minor issues and resolve them before they become major cash flow or other crises.
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