For years, a small business owner charged customers the same prices.
The business had grown. There were more customers, more orders, and more work to handle. From the outside, everything seemed to be moving in the right direction.
But something had changed. The cost of supplies had increased. Software subscriptions were more expensive. Labor and other operating expenses were taking a larger share of the business's revenue.
The owner was working harder and serving more customers, but the amount left over wasn't growing as expected.
The prices, however, had never changed.
When Your Costs Change but Your Prices Don't
Many business owners set their prices when they first start operating and then continue using them for years.
That may work for a while, but business costs don't necessarily stay the same. Suppliers increase prices. Service providers adjust their fees. Employees receive raises. Rent, insurance, software, and other operating expenses can gradually add up.
If prices remain unchanged while costs increase, profit margins can become thinner. The business may still be generating more revenue, but it could be keeping less from each sale.
More Sales Don't Always Mean More Profit
The owner had been focusing on the number of customers and total sales. Those numbers looked encouraging. But revenue alone didn't show whether the business was earning enough to support its operations.
To understand what was happening, the owner needed to look more closely at the numbers:
How much did it actually cost to provide each product or service?
Which operating expenses had increased?
Were certain products or services less profitable than before?
Were current prices still covering costs and leaving a reasonable profit?
These questions could help the owner determine whether pricing needed to be adjusted.
Your Numbers Can Help Guide Pricing Decisions
Pricing isn't simply about charging more. It involves understanding the costs of doing business, the value being provided, customer expectations, and the market.
Accurate bookkeeping helps business owners see how revenue, expenses, and profitability are changing over time.
For example, comparing expenses across several months or reviewing the profitability of different products and services can reveal changes that might otherwise go unnoticed.
Without reliable financial information, an owner may continue using outdated prices simply because they have always worked in the past.
Don't Let Yesterday's Prices Determine Tomorrow's Profit
A price that made sense when the business started may not make sense several years later.
Reviewing your costs and financial results periodically can help you make more informed pricing decisions and understand whether your business is earning enough from the work it does. You don't necessarily need to change every price. But you should know whether your current prices still make sense.
At The Bookkeeping Advisory Team LLC, we help small-business owners keep their financial records organized and their numbers up to date, giving them better information to understand their business and make informed decisions.
Want greater visibility into your business finances? Text us or use the Contact Us form on our website to learn how professional bookkeeping can help.