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Let’s look at breaking even and how it will influence how you decide your pricing. If you haven’t already, go back and listen to the Money Money Money episode, which will help you start to understand your figures.
And don’t forget to download the free worksheet for this episode.
Many people skip the very, very important step of thinking about how much you actually need to earn to survive, how much you need to earn to live well, and what you’re actually charging. Those are obviously connected. It doesn’t matter if you’ve got a business that doesn’t bring in enough to pay your mortgage. If it’s going to give you more stress and anxiety than having a paid job with a regular income, then you might as well stay employed and working for someone else, right? To have that guaranteed security?
I want to talk to you about how these all are linked and how you can start working them out and thinking about them.
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First of all, I want you to spend some time working on your budget. So whether you have already started your business or whether you’re thinking about it, sit down and do a budget, a personal budget, and a work budget.
How much do you need to earn to survive?
And how much do you need to bring in to cover your business overheads?
What is that minimum number that you absolutely need to come in?
Also bear in mind how much you would like to earn, right?
How much do you need to bring in to be able to afford all those nice little things that you like doing, getting your nails done every few weeks, or going for brunches with your friends.
Maybe have a third budget, which includes a lot more luxuries. What is the ideal budget? What would you like to bring in? What are you aiming for is the next big step in terms of your income.
So once you’ve got all of those figures, have a little look at the worksheet and what I want you to do is complete the following different boxes based on those figures you’ve just worked out.
There’s a space for you to fill in your total amount of monthly bills and your total predicted business expenses. Or they might be your actual business expenses if you’ve already set up.
Include in there the amount of desired spending money per month and amount for additional foreseen monthly costs, anything else that might come up.
Now you’ve got a subtotal.
And what I would do is add to that about 20% on top of that for tax and light contingencies. I call them light contingencies because that will not be enough to ringfence some money for, for big expenses like a new kitchen or luxury holiday. And also when I say 20% have a chat with your bookkeeper who you’ve now obviously hired, because I’ve talked about it so much about what is a sensible amount to start putting aside for taxes.
It might be in your first year that you actually don’t need to save that much for taxes because maybe your startup expenses have been quite high. So chances are you don’t have to pay as much tax this year. But maybe you want to start saving for something else, a big holiday, a wedding. So have a chat with your bookkeeper. Have a little think about what your upcoming expenses are and how much this additional amount should be that you were saving.
Now you’ve worked out your total, put this into Box A. This is your ideal or your break even point, depending on what you have put in your budget. This is how much you would like to earn to cover all your bills and your lifestyle costs, and obviously your business costs. Please note though, these figures may not be exact. They’re just here to start you thinking about how much you need.
How much do you need to earn and therefore, how much do you need to charge? Are you starting to see how it’s all linked together?
Next we’re going to work out how many hours you can work per month or you want to work per month. This is a combination of how many hours you have available and how many hours realistically you want to work or you can work.
Have a little think on your average week, how many hours you would be available to work. Now times that by 4.5 to work out an average amount of hours you are available to work per month. And put this into Box B.
Now take the figure from Box A, which is the amount of money you would like to be able to bring in, and divide it by the figure in Box B, which is the total amount of hours that you are available to work a month and what you have now is what you are aiming to earn per hour.
To be clear, if you’re offering a one-to-one service or some kind of service where you’re charging an hourly rate, this is not how much you’re charging per hour. If the answer to the question above is £20 an hour, you will need to be charging more than that to cover the hours that you are working, but not actually billing a client. For example, your marketing days, your money days when you’re preparing invoices and so forth.
If you’re selling products and maybe more difficult to calculate how much you are earning per hour, again, this is something your bookkeeper can help you with. But knowing these figures will help you decide if your business idea in your model are financially viable and will help you understand what to do with your pricing.
For example, I really like cross stitching, but imagine I need to make £2,000 a month to be able to pay all my bills, but it takes me 20 hours to make one cross-stitch and I plan on working for a hundred hours a week. I would have to charge approximately £400 per cross-stitch to break even. Is this realistic or do you think perhaps I would need to look at another business model?
Well this has been the last episode of season one. Thanks so much for joining.
I will be back soon for Season 2 with more tips and tricks and advice on setting up and running your business.
In the meantime come join us on our facebook page www.facebook.com/thebeautyofourdreams