Profitability & Pricing At The Right Value

Feb 16, 2015

Typically we deal with manufacturing clients, but it is important to note that costing can be applicable to a variety of industries. I recently began a costing project for a non-manufacturing client. This particular assignment is interesting in that the owner was not making money considering the volume of work she was doing. The most logical thought is she does not know her costs.

It seemed that she was under-billing her customers, which resulted in her inability to cover her costs. If she was billing her customers enough to cover her costs and produce a profit, she would certainly make money. She agreed this was most likely issue and eagerly provided us the necessary information to determine her problem.

pricingAfter reviewing her numbers, we were surprised to determine that the owner was not billing her rates. Basically, we calculated her average billing rate based on the billable hours from 2014 and the revenue earned. We then compared that data to what that average would have been had she actually charged the rates she said she charged. You will not be surprised to hear that her actual average billable rate was lower than what it should have been.

Upon further investigation and conversation, we realized the owner was giving clients discounts based on bargaining. In addition, she was having subcontractors perform some of the work and then paying them for the hours they work even if it was more time for which she could bill the client. She now recognizes she must be more assertive and hold her subs accountable for the work that they are doing and the time that they say it will take. Furthermore, she must stand firm to the worth of her work stop undercutting her rates.

When you are starting a business, it critical that set the right precedence. Is there any essential advice you would give a new business owner? Have any of you experienced similar situations?

Categories: Cost Accounting