Crunchers Accountants

Crunchers Accountants

Pricing for Profit Seminar Report

Archive for January, 2012

Pricing for Profit Seminar Report

Last night we had another successful seminar, this time themed on pricing.

The seminar is very powerful, mainly because most people do not realize the dramatic effect that price has on profit.  We looked at a typical British business (based on results consolidated across the business sector by KPMG).  The research shows that a typical business has a 25% gross profit (before overheads) and a 5% net profit (after deducting overheads).  One of the first things we distinguished is that for a typical British business a price decrease of 10% will produce cause a such a company to go from a 5% net profit to a 5% net loss.  Conversely a 10% increase in price sees profit rise by 200%.

The common concern for increasing price is that you lose customers, but our model business showed that for a 10% increase in price you could afford to lose up to 28% of your customers and still maintain the same profit.  We saw that even if you lost 20% of your customers in this model, you increase your profit by 60% with the 10% increase in price.

Given that most people are prepared to pay a little bit more if you give them a good reason, the name of the game becomes establishing that value that you can provide above others, carefully choosing how you position your product or service and taking control of the price.

We looked at a variety of tactics in finding ways to increase prices, including relaunching your product or service with new guarantees or service standards; charging different customers different prices with integrity through having quality and economy versions of your product; bundling products; trade ins; charging different prices depending on the timing of sale or delivery of the product; concessions; top down pricing and decoy pricing.  We looked at the cost of discounting your price.

Finally we spent time in workshop session coming up with actions to take on in our businesses.

As ever feedback was highly positive: 8/10 for overall value.

For those who missed the seminar, we are working on a video that should be ready in the next couple of months.  If you would like to receive this when it becomes available, let me know by email.

February’s seminar will provide training in reading accounts.  It is easy to forget that accounts were originally created as a management tool (rather than as something used for filing tax returns).  Many business owners have never been taught the skill of understanding what the numbers that accounts tell them about the business.  This seminar is designed to address that issue.  It will take place on 27th February 7 – 8.30pm.  Venue to be confirmed.  Click here to register.

Time – the missing piece of the jigsaw

Having just spent the month preparing accounts for people, the issue of time as a resource keeps cropping up in my thoughts.  The more I think about this aspect of a small business, the more I see it’s importance and the way it is neglected as a resource.  Let me explain.

There are two main resources that a business can expend.  One is money the other is time.  You may be lucky enough to have people volunteering for your business but unless this is the case, the time we are referring to is your time.  For many of the businesses I work with, the time resource is actually much more significant than the money resource.

I say it is more significant than the money resource for three reasons.  Firstly in most businesses this size, it is the main route to investment in the business.  If you think about it, most times you want to invest in the business and develop it, whether it is updating your website or making a strategic partnership, the first resouce you will use is your time.  Businesses constantly need investment or they will dwindle and fail.  Secondly for most businesses it is larger than other resources expended.  Let us say you put a nominal value on your time of £20/hr.  Let us say you work a 35 hour week 48 weeks of the year (most small business owners work much longer hours), the expenses is £33,600 – usually larger than any other single item in the list of your list of expenses.  Lastly it is more significant because it is finite.  You cannot buy more of your own time, everyone has 24 hours in the day and that is it.

The trouble comes because we rarely consider it when we plan or when we analyse our business.  I am seeing many sets of accounts showing a profit which would show a large loss if we included the business owner time as a resource.  In effect the business owner is subsidising its customers.  To be brutal about this situation, this is then not a business but charity, patronage or simply a hobby.

On the planning side it is equally important.  I have direct experience of this running a community arts charity for many years.  We had many good financial practices, annual budget, cash-flow forecasts, management accounts and so on.  However we crucially did not plan time as a resource until it was much too late.

What happened was that the budget balanced when we had around 70 projects running in the year.  What we did not realise was that when we had 70 projects running we did not have enough time to do everything that was needed in the business.  Working long hours and weekends we could service those projects.  We could just about keep up with admin, but crucially we could not do any marketing or development work.  We had to be working flat out to keep our heads above water.  What this meant was that marketing and fundraising ended up happening as a reaction to a crisis of not having enough work on.  When times got tough, the operation as a system started to fall apart.

A business is like a machine with different parts requiring their own resource – admin, marketing, production, facilities, decision making etc etc.  If one part of the machine is starved of resource the machine has a tendency to break down.  It is much like a car.  Clearly it needs petrol to run, but it needs more than that.  You need to top up the brake fluid from time to time, replace parts, keep the radiator topped up.  It may not be a significant resource, but unless you provide it, the car breaks down.

One of the places this has shown up in the last month is the way that people scramble to get their bookkeeping and accounts done in January.  In a business where time was planned as a resource, this administrative task would be something done for an hour or two each week.  At the year end in March most of the work would be done and it would be a relatively simple job to get everything together to complete the accounts.

Whilst admin and bookkeeping are rarely as important to a business as strategic decisions and marketing the rule still applies that if they are starved of resource, the whole machine can stop working.  In the case of bookkeeping, this typically happens when HMRC comes to call and slaps on a fine.

The irony of this for small business owners is that most are not in it for the money  (See recent research).  They want the money to keep going but more often they are in it for quality of life and freedom.  It is ironic because by not bringing a business perspective, they can find themselves working harder than ever and trapped in a dynamic which demands they give their time without question.

The good news is that if you set up the machine of a business to accommodate your time, it really can deliver freedom and quality of life.   The place to start is to look at it like a system – one that you design and control.  If you are really interested to turn your business into this kind of system I highly recommend reading E-Myth by Michael Gerber, and coming to the Crunchers seminar series.

Top Tax Tip 2 for Sole Traders

Continuing in my series of top tax tips for Sole Traders comes clarification on an old chestnut: claiming use of home as office.

The idea here is that as a sole trader you don’t rent an office but you use a part of your home.  Therefore you put through a proportion of your household as as a business expense.

Many myths and counter myths surround this proposition.  What is allowable, what is not, what proportion you can claim and whether it lays you open to capital gains tax if you sell your home.

Firstly let us be clear that this is an allowable expense if you actually use part of your home as an office (or for some other business purpose Eg storage).  Let us also clear up the idea that it will attract Capital Gains Tax if you sell your property.  In 2008 HMRC clarified that this is not the case as long as you do not claim the repayment element of your mortgage (in other words only claim the interest element).

That being so, the next question is ‘what proportion can I claim?’.  The principle that HMRC are looking for is a ‘reasonable claim’ in proportion to use.

First calculate the total number of rooms in the house that are available for business use excluding bathroom, hall, kitchen, toilets.

Then calculate the number that are actually used.  Then estimate how much of each room is used.  In other words if the spare bedroom has a desk where you do your office work and a bed where guests can stay, estimate how much of the room gets used as an office – say 50% for arguments sake.

Then calculate how much of the time it gets used exclusively for business and how much is is used for other purposes.  For example, if you use the room one evening a week and the rest of the time the children play in the room, only claim for in proportion to one evening a week.  On the other hand if you have a dedicated room for your office and while you don’t use it every day, it is full of business admin filing and never used for anything else, claim that room as being used 100% for business.

Generally it works to apply that total to the entirety of your household bills (mortgage interest / rent, insurance, gas, electricity, council tax, water rates etc) but sometimes you might find that does not produce a ‘reasonable’ result.  For example you might have  a business that requires a lot of electricity.  In which case split out that cost and apply a different proportion.

By now you may find yourself thinking ‘life is too short to really be bothered with this!’.  I sympathize.  In which case there are a couple of ways out.  HMRC has a no questions asked allowable claim of £3/week.  Alternatively send me an email and I have an easy-to-use Use of Home calculator that I can share with you.

NB:  Company directors and employees beware – the advice above is specific to sole traders and different rules apply to directors and employees.

Why spotlight on tax avoidance is good news for Sole Traders

You may have noticed that tax avoidance by corporations and wealthy individuals has been steadily gaining public attention and moving up the political agenda.

It has been a rallying cry for the the Uncut and Occupy movements.  Last year Barclays Bank was in the news when a startlingly low tax bill of just 1% was revealed on 2009 profits (see Guardian 19/2/2011).  Glasgow Rangers Football Club was fined for use of a tax avoidance vehicle known as an Employee Benefit Trust (see BBC website 15/09/11).  Today Tony Blair has been accused by tax campaigner Richard Murphy of suspiciously obscure corporate arrangements (Telegraph 11/1/12).  Government has begun to sit up and listen, perhaps mindful of the promise that we are ‘all in this together’.  HMRC has come under attack for having too much of a ‘cosy’ relationship with large corporations (Daily Mail 16/3/11).  David Cameron has promised action (BBC 5/1/12).

Traditionally business people are expected to welcome any news that reduces tax collection and fight any proposals that increase it.  Remember that we are talking about tax avoidance which is legal, not tax evasion which is not (although finding the dividing line between the two can sometimes entail going to court).  However I can think of three powerful reasons why Sole Traders and other small business owners should welcome this news.

1. The tax avoidance strategies employed by these organisations and individuals are in practice not available to small businesses.  To employ them you need expensive legal counsel and accounting fees that small businesses cannot afford.  The effect is that the business that can afford them have a massive advantage over your average small business owner.  Let us say you are a grocers shop.  You might be more efficient in running your business than one of the large supermarkets but you still might not be able to compete with their prices because they only pay 10% tax where you pay 20%.  The large energy companies are starting to move into areas like domestic plumbing services, again if they have found a way to pay less tax, the average plumber starts with a handicap when putting in a quote for a job.  You might be surprised to learn that some of these tax avoidance vehicles are also being offered by your average High St accountants to medium sized companies.  In other words the competitive advantage that tax avoidance affords is getting closer and closer to a Sole Trader’s door step.

2.  The more tax collection that is lost from large corporations and wealthy individuals, the more that must be found from employees and business that cannot afford these schemes.  Most Sole Traders and small business owners are included in this category.  More than that most of their clients are as well.  It is rare for Sole Traders and small businesses to do work for medium to large scale organisations and very high wealth individuals.   The more tax burden corporations and wealthy  this sector bears, the less the rest of the economy will have to bear and the more money there will be in the rest of the economy to spend on the kind of services and products Sole Traders are selling.

3. The more time HMRC spends looking into the tax affairs of large business and wealthy individuals, the less it will spend coming after small businesses.  The fact is that it is easier to come after a small business owners than a large corporation.  The more political pressure that comes to bear on HMRC to divert resources into stopping tax avoidance by high wealth individuals and corporations the better for the rest of us.

This kind of issue is one reason that I am recommending membership of the Federation of Small Businesses.  Apart from a host of benefits that to me seem incredibly good value, the FSB lobbies politicians on issues such as these.