Using Financial Data to Make Pricing and Growth Decisions

A full calendar can hide a price that does not cover the work. A competitor’s rate can look safe and leave your overhead unpaid.

Financial data for business decisions replaces that guess with a short set of reports. SCORE says to stop picking a number out of thin air. The SBA gives you the volume math. AccountingCoach shows what has to be covered before the next sale becomes profit. Forbes Advisor turns the same idea into a monthly count of sales.

Read the profit statement before you pick a number

Use financial reports for pricing by starting with the profit and loss statement. Forbes Advisor says you read it from the top. Sales. The cost to deliver those sales. What remains after the rest of the costs.

The lines Forbes Advisor names are the financial metrics a pricing decision uses.

Use the P&L for decisions when those lines move apart. SCORE’s statement guide says rising revenue can hide expenses that outpace it. The responses it names are lower expenses or higher prices or both.

AccountingCoach says gross profit has to cover selling and general and administrative costs and items such as interest before net income can be positive. It says holding the gross profit percentage is hard. Price pressure and higher supplier costs and inflation all push on it. For a company that sells products, AccountingCoach says the cost of sales is the dominant operating expense. It puts that cost at 60 to 80 percent of net sales in many cases. A price that ignores that share cannot fund the overhead underneath it.

Forbes Advisor separates the work that makes this page usable. Bookkeeping records the transactions. Accounting turns them into reports you can act on. The chart of accounts is the list behind every line. If marketing and payroll and materials share one bucket, you cannot see which cost changed. Forbes Advisor says to keep business accounts separate from personal accounts from the start. A price built on mixed spending is covering a life, not a job.

Three ways to set a service price

SCORE’s pricing guide is for consultants and freelancers and other service businesses. A product has a unit cost you can see. A service price has to cover tangible expenses and the value of skill and time. SCORE says to use one of these methods or a mix.

Cost-plus is the floor. Add overhead such as software and insurance and marketing and taxes. Add the personal income you need. Divide by billable hours. SCORE says this covers costs. The method caps what you earn at the hours you can bill.

Competitor rates are a reference. Look at regional rates so you know the market. SCORE says your experience and your efficiency can support a higher rate. Do not treat the neighbor’s price as a ceiling.

Value pricing uses the client’s result. SCORE’s illustration is a two thousand dollar package that helps a client generate fifty thousand dollars of revenue. Billing that work by the hour underprices the outcome. The fifty thousand dollars is the illustration. It is not a promise your work will produce that return.

Then test the rate against cash. SCORE says to build a cash flow projection and check that the rates cover operating costs and a dry spell. A price can look profitable on a full month and fail in a quiet one.

The volume math

Pricing based on numbers needs a break-even point. The SBA defines it with one formula for a single product or service.

Fixed costs ÷ (price per unit − variable cost per unit) = break-even units

In sales dollars, the SBA divides fixed costs by the contribution margin. Its contribution margin is price minus the cost to make the product, divided by the price.

You need four estimates. Monthly fixed costs. Price per unit. Variable cost per unit. Expected unit sales, so you can see whether the plan clears the line.

The SBA’s examples of fixed costs are rent and salaries and property taxes and insurance and interest and depreciation. They do not change when volume changes. A quarterly bill belongs in the month. Divide it by four. A one-time startup cost in the SBA calculator is spread by dividing by 12. Examples include a permit and a legal fee and software.

Variable costs move with volume. Some costs are mixed. The SBA calls them semi-variable. A phone bill or fuel or power or indirect labor can have a fixed piece and a piece that rises with production. Split them if you can. The SBA says salaries can rise once production passes a set level. That extra pay is the variable piece.

AccountingCoach draws the margin a different way, and the difference matters. The contribution margin ratio is the share of the price left after all variable costs and variable expenses. That share is what covers fixed costs and fixed expenses and profit. AccountingCoach says this ratio and the gross margin ratio are different. You cannot compute the contribution margin ratio from the amounts on an external income statement. The P&L gives you gross margin. The contribution margin needs a split between variable and fixed that the outside statement does not show.

AccountingCoach’s example is one product.

• The price is twenty dollars.
• Variable manufacturing cost is four dollars.
• Variable selling and administrative cost is two dollars.
• Contribution margin is fourteen dollars, or 70 percent of the price.
• Fixed manufacturing is eighteen thousand dollars a month.
• Fixed selling and administrative costs are twelve thousand dollars.
• Fixed interest is one thousand dollars.
• Fixed costs to cover are thirty-one thousand dollars a month.

In that example, 70 percent of sales is available for those fixed costs. After they are covered, 70 percent of further sales flows to net income. Those percents belong to the example. Copy the method. Do not copy the 70 percent.

Forbes Advisor’s landscaping example uses the same division. The contract price is two thousand dollars a month. Crew wages and gas and supplies total one thousand one hundred fifty dollars. Contribution margin is eight hundred fifty dollars. Monthly fixed costs are thirteen thousand six hundred dollars. Divide the fixed costs by the margin. The example’s break-even is 16 contracts a month. Extra contracts are the ones that produce profit. Fewer contracts mean the fixed costs are not covered.

The SBA says this math is an estimate for a business plan and for a lender. It is not a perfect accounting result. Real books come after the costs happen. The SBA suggests adding 10 percent for costs you cannot predict. For several offers, add the monthly totals or run the formula once per offer when the mix changes.

When the numbers say to change the price

Data-driven pricing is a habit of signals, not a hunch.

SCORE lists these signs that a service rate is too low.

• The schedule is 80 percent to 100 percent full and you are turning work down.
• Nine out of ten prospects accept with no hesitation and no negotiation.
• Software or subcontractors or health insurance or the cost of living went up. SCORE says those increases call for a yearly rate review.
• The work takes less time or the scope grew. SCORE says you should not earn less because the job takes less time.

SCORE says a healthy close rate depends on the service and the audience. In some niches, closing more than 30 percent of leads is treated as a solid goal. SCORE cites HVAC niches with an average close rate of 65 percent to 75 percent. Use those figures as SCORE’s examples of how wide the range is. They are not a quota for your trade.

On a product P&L, the signal is the margin. If the cost of goods or the overhead outruns the price, SCORE’s statement guide points to a higher price or lower costs or both. AccountingCoach’s warning is the supplier bill and the market price moving against you. Recheck the gross margin when either one moves.

How you tell the client is part of the decision. SCORE says to give current clients 30 to 60 days of written notice. You can give loyal clients more time at the old rate, or a small discount against the rate for new clients. Talk about the tools and the team and the quality of the work. SCORE says to leave personal expenses out of that conversation. If a client cannot pay the new rate, change the scope. Offer a smaller tier that fits the old budget. Do not cut the rate and keep the same work.

Hiring and other growth spends

Growth decisions and financials use the same test. Can the benefit cover the full cost?

The SBA’s cost-benefit analysis adds the benefits and the costs over one period, then subtracts the costs from the benefits. It names hiring an employee or a contractor as a fit for this test. The SBA’s own illustration is a restaurant it calls Haute Dog, deciding on outdoor seats. Estimated extra profit is five thousand dollars a year. The permit is one thousand dollars a year. Tables and chairs are two thousand dollars. Benefits exceed costs by two thousand dollars in that illustration, so the SBA’s example says to add the seats. Your hire needs the same kind of estimate. The sources do not supply your revenue gain. You do.

A wage is not the full cost. The SBA’s August 2019 post says a rule of thumb puts the real cost at 1.25 to 1.4 times salary, depending on the variables. On a thirty-five thousand dollar salary, that post puts the range at forty-three thousand seven hundred fifty dollars to forty-nine thousand dollars.

The same post splits the extras.

• Payroll taxes. The employer share of Social Security and Medicare in that post is 7.65 percent of pay up to the wage base, then 1.45 percent above it. The post lists the 2019 wage base as one hundred thirty-two thousand nine hundred dollars. Check the current base with the IRS before you budget.
• Unemployment tax. The post states a FUTA rate of 6 percent with a 5.4 percent credit for most employers. That leaves 0.6 percent. The post puts the tax at forty-two dollars per employee in that description. State unemployment tax depends on your state and on claims by former employees. A multi-state team can mean more than one state rate.
• Insurance. Workers’ compensation varies by state. Some work needs professional liability coverage or a bond. The post says payroll taxes and this insurance are deductible.
• Benefits. Federal health-insurance rules in the post apply to employers with 50 or more full-time employees, counting full-time equivalents. Smaller employers are not under that mandate in the post. A federal credit may be available if you pay at least half the premium. Retirement contributions are a choice under federal law in the post, and they belong in the package if you make them. Paid leave rules differ by state. The post says the District of Columbia puts that cost on the employer.
• Harder costs. Recruiting and background checks and drug testing and training and uniforms and protective gear. The post says these are difficult to put into one number. They are real.

The post’s closing is two sentences you should hold together. Add the costs and see whether you can afford the person. If the business is growing and you need the help, skipping the hire has a cost too. The budget is how you do both.

Marketing sits in the overhead SCORE uses for cost-plus pricing, and in the operating expenses on Forbes Advisor’s P&L. A campaign is a cost-benefit problem when you can estimate the sales it should bring and the spend it will take. Subtract. The sources do not give a standard ad budget or a guaranteed return. If you cannot estimate the benefit, run a small test. Then check whether revenue and gross profit moved. Do not treat a busy month as proof the ad worked until the P&L shows the margin.

The SBA’s planning guidance is the monthly check on growth. Compare results with what you expected and with the prior month and quarter and year. If sales rise, adjust inventory. If sales fall, adjust spending. Look at the work behind the numbers and choose what to change.

Pitfalls

• A competitor’s price with none of your costs. SCORE says the market rate is a reference. Your overhead has to fit inside it.
• Gross margin used as contribution margin. AccountingCoach says the outside income statement will not give you the contribution margin ratio. Split variable and fixed costs first.
• A break-even with no cushion. The SBA suggests 10 percent for costs you cannot predict. A single-product formula misleads when you sell a mix. Run the offers separately when the volumes differ.
• A wage-only hire. The 2019 SBA range is a starting band. Taxes and insurance and benefits and training sit outside the salary. The wage base in that post is not this year’s base.
• A price increase with no notice. SCORE’s window for current clients is 30 to 60 days in writing. A same-week change is not what that guide describes.
• A discount that keeps the full scope. SCORE says to shrink the work to the old budget. The rate stays.

A decision pass you can repeat

Small business financial analysis does not need a new system every month. It needs the same questions.

1. Pull the profit statement for the month. Note gross margin and overhead and net profit against the prior month and the forecast.
2. List variable cost per unit and monthly fixed costs. Run the SBA break-even. Add the 10 percent cushion.
3. For a service rate, check the calendar and the close rate against SCORE’s signals. If you raise the price, write the notice and the date.
4. For a hire or a marketing test, write the benefit and the full cost for one period. Subtract. Use the SBA wage multiple only as a band, then add the costs that apply to your state.
5. Check the cash projection. SCORE wants the rate to survive a dry spell, not only a full month.
6. Write the decision in one line. New price. Same price. Smaller scope. Hire. Wait. Cut the spend.

Business growth data is that line next to next month’s report. Those financial insights for a small business show whether the change showed up in sales and in what was left.

When the categories are consistent, the profit statement is the record of the decision. QuickBooks Online is one place those categories and the bank activity can live. The software does not choose the price. You do, after the margin and the break-even are on the page.

Set a date each month for this pass. If the report comes from QuickBooks Online, open it after the accounts are reconciled. A price you can defend is one that covers the direct cost and the overhead and leaves room for the dry month. The reports are how you prove that before you send the next quote.