Using Budgets to Price Your Products and Services

One of the challenges facing eye-care practitioners is how to price additional products and services. At various times there has been talk of setting a guide for standard fees across the industry, but this raises potential price-fixing red flags with the Trade Practices Commission. 

How you price a product or service is directly related to what that product or service costs you to provide. And the truth is that the 'cost' of a product or service varies from business to business, even within the same industry. This is certainly the case for eye-care practitioners. While some costs will be similar between practices, each will have its own unique value for inputs and overheads. This means that the only true way you can accurately price your products and services is to have intimate knowledge of your costs.

To make your pricing work for you, however, you need not only to know your costs, but also control them. This is where budgeting can help. We've run some articles on budgeting in our newsletters, but it's worth repeating the highlights here.

There is nothing difficult or secretive about budgeting. It is in practice simply a matter of taking an educated guess and monitoring it. Here's some tips to get you up and running.

1. Use last year's figures

An easy place to start with budgeting is to take last year's actual figures and make them this year's budget. Before you do so, you'll need to decide how often you'd like to check the numbers. The most common budgeting period is monthly, but you might prefer quarterly (or even weekly if you're super keen!). Obviously, the more often you do it, the more timely the information and the better you are able to react to certain trends that emerge. If you're not sure how to break down last year's figures into periods, simply spread the amount evenly across the number of periods. For example, if you choose to budget monthly, take last year's expenses and divide them by 12.

2. Keep an eye out for obvious changes

As you start using last year's actuals for this year's budget, you'll notice certain obvious income and expense items that are likely to change, without having to do much research or drilling down into records. For example, you might have renewed your mobile phone contract and be paying a different rate. You can quite easily make these changes on the fly as you are creating your budget. You might also make some adjustments where the spread is clearly not as simple as, say, dividing by 12. For example, many utilities are paid quarterly, so rather than simply dividing by 12, you might instead choose to put the four payments in the relevant months and have zero as your budget for the other months.

3. Put it all into a spreadsheet

If you put all of this in to a spreadsheet and deduct the budgeted costs from the income, you have a budget! If you're using accounting software, you can ignore this step. Read on for more information! 

4. Take the next step - set some goals

To start with you might be happy to leave it all there. But you might choose to budget because you want to grow your income, or perhaps there are some costs you need to rein in. If you're using your budget to help you monitor costs for pricing purposes, this becomes particularly important, because you will need to keep your costs within certain limits to achieve your margins. Budgeting actually helps you to understand your costs better and encourages you to analyse more deeply where money is going. It also helps you to control costs in the future. So once you have your budget based on last years figures, you can start digging deeper. What can be reduced? Where might there be savings? Can we get a better deal on phones or other utilities? 

5. Monitor your actual income and expenses

Of course, budgeting isn't much good without monitoring. You need to compare your actual figures with your budget to see whether you are meeting your targets. This is where things may start to get a little trickier, because you need to have current data. If you use accounting software, this information should be available to you but if not, it might mean getting your accounts prepared more often, for management purposes rather than simply for taxation compliance reasons.

6. There is some good news for users of accounting software

Many accounting software suites have built in budgeting functionality. They can create a budget for you, often by simply pressing a button that will use last year's figures, which the software will already have. The numbers are still editable so you can make changes based on current or proposed activity. The beauty here then is that as you enter your current period data into your accounting software as a part of your regular bookkeeping, you are also entering the 'actuals' for your budget. Making a comparison then of your budget versus your actual results is as simple as running one of the many pre-defined budget reports provided. So you may already have the means and the data to create a budget with a few clicks.

Budgeting is a relatively simple and cost-effective risk management strategy. But it's also invaluable in helping you to understand your cost structures and use that information to price your services. 

We can help! Call Dewings on (08) 8291 7900 if you need some help with budgeting and pricing your services.