Last month’s blog post began our exploration of the accounting world with a list of definitions of terms. Please reference that post here for the basics of accounting that you must know for your coaching business. Now we explore the second step of understanding accounting – this step is to be familiar with three accounting tools which will help you make financial decisions in your business. They are return on investment (ROI), margin and markup. Rememer that we are exploring them from the stance of a non-accountant, for in-depth understanding, make sure to contact your own accounting professional.
Return on Investment (ROI) is a tool used to help in business decision making because it helps determine the profitability of particular actions. ROI is figured by looking at the cost of a business decision and comparing it to the expected income from that decision. It is profit divided by investment. The investment (costs) of the project under consideration need to include both money and time. The expected returns (profit) from a particular program vary depending on circumstances and may include income, numbers of clients or even new names on your mailing list.
For example, you may be considering doing a presentation to a local group. You take the fee you will receive for the talk and subtract out your expenses for preparation and travel. Calculate how much time it will take you to prepare for and give the talk and divide this by your fee to get your hourly pay rate. This is your actual earnings for the event, but ROI is much more.
Decide from past experience how many clients you are likely to get from this appearance (or however you are measuring expected return). Then calculate the dollar amount you can expect to collect from them. When you divide this dollar amount by the number of hours of time you will spend in preparation and delivery of the presentation, you will have your ROI. If your target for the talk is to get names on your mailing list, rather than new clients, the ROI will tell you the cost in time and dollars for each name. Using this type of thinking when you are making your business decisions, allows you to base your decisions on economics rather than strictly on emotions.
Markup and margin are always important whenever you make a pricing decision in your business. These two terms are easily confused, but understanding them will give you clarity in your pricing decisions. Margin is the percentage of the price of a product or service which is profit. This is the way that the majority of the business world determines price. If it costs me $5.00 to produce a copy of my book and I sell it for $15, then my profit margin is $10 or 66%.
Markup indicates what percentage of the cost of the product is profit. In our case above, the cost of $5 and the price of $15 gives a mark-up of 200%. Markup is a quick and easy calculation, but it does not give you much information about the impact of your expenses. In other words, markup gives you price information only. If you are looking for profit information, be sure to use the concept of margin.
About the author – Janet Slack of Life Adventure Coaching is a specialist in helping coaches and other solopreneurs add structure and planning to their businesses so that the businesses don’t take over their lives. Sign up for her free newsletter Biz Tips for Coaches or visit her blog.
