Businesses come to us at all stages. But, most business plans I am privy to from people starting out are full of details about the product, the website and the logo, or the who, where, and why. When it comes to planning the finances, rent and marketing costs are often included, but the pricing plan is vaguely “price competitively”. Then, somewhere in the second year, the business that looked fine on paper runs short of cash.
So many service based business owners in particular will price based on what they see their competitors charge without much question, especially in the trade space. Justifying the strategy as ‘no one is willing to pay more’. But, if your costs are higher than the comparable business, you are already falling behind.
In my work with Australian small businesses in their first years of trading, the cash crunch almost always traces back to three numbers nobody worked out before launch: the price that actually breaks even, the tax or BAS bill that’s coming, and the reserve the business needs for its industry. So, here’s how to build each one, before you take your first customer.
Number 1: Your break-even price, not your competitor’s price
Copying a competitor’s price feels safe, but you don’t know their costs or whether they’re even profitable at the end of the day. A better starting point is break-even: how many sales or jobs you need each month just to cover your costs.
The calculation is simple:
Monthly fixed costs ÷ (price per job − direct cost per job) = jobs needed to break even.
Say your fixed costs (rent, insurance, software, vehicle, your own minimum pay) come to $8,000 a month. You charge $400 per job and each job costs you $100 in materials or travel. That leaves $300 per job to cover fixed costs, so you need 27 jobs a month just to break even. If your realistic capacity (and remember to count for public holidays, school holidays, sick days) is 25 jobs, the price doesn’t work, however competitive it looks.
Two pricing traps catch new businesses in particular:
The GST quoting trap. Once you’re registered for GST, compulsory once your turnover reaches $75,000, one eleventh of every GST-inclusive price belongs to the ATO. Quote $1,100 “including GST” when you meant $1,100 plus GST, and you’ve just given away $100 on every job. Decide before launch whether you quote GST-inclusive or exclusive, and make sure every quote and invoice says so.
The launch discount that never ends. Introductory prices are fine, but put an end date on them in writing. A “temporary” 20% discount with no end date quietly becomes your real price, and your earliest, most loyal customers become the hardest to move. We have seen so many businesses get stuck with this, or believe they need to consistently discount to be able to attract customers.
If no one wants your offer for the price you need to cover your costs, you might need to reposition your offer, package it, or re-assess the market.
A trade client came to us with a strong 7-figure turnover a few year in to business, a big team of subcontractors and an ever-growing pipeline across the country. From the outside, business looked great, the director was being approached to partner on bigger deals and continue on a positive trajectory.
We took a thorough look at the numbers and the business’s running costs had been quietly creeping up year on year, but costs, BAS debt and bad debts had been eating away at margins for years.
We reviewed costs and carefully cut back on unnecessary spend. Then, we determined the realistic team capacity conservatively week on week and found the break-even point and ideal minimum price point for a job as a day rate.
Number 2: Your tax bill, including the year-two double-up
New business owners usually plan for their BAS (Business Activity Statement). Fewer plan for what happens in year two..
Here’s the pattern. In your first year, no income tax comes out of your business income along the way, so your cash looks healthy. You lodge your first tax return after the financial year ends and receive a bill for that first year. Then, because you now have a history of business income, the ATO may put you into PAYG instalments. These are regular payments towards next year’s tax. So in year two you can be paying last year’s tax bill and this year’s instalments at the same time.
It isn’t a penalty. It’s just timing. But if nobody warns you (often), it lands like one.
Build tax into your startup budget from day one:
Budget a tax line every month, not just at BAS time. Treat GST collected, PAYG withheld from any staff, and a percentage of profit for income tax as monthly costs in your budget, even though you pay them later. Your accountant or bookkeeper can help you set the right percentage for your business structure with a comfortable buffer.
Choose your GST setup deliberately. Most small businesses can report GST on a cash basis (when money is received and paid) rather than an accrual basis (when invoices are issued). Cash basis often suits new businesses with slow-paying customers, because you’re not paying GST on money you haven’t received yet. You can also choose to lodge monthly if that helps you stay on top of it, but consider the extra admin overhead of doing so and the penalties if you lodge any statement late. Keep on top of the BAS due dates for quarterly and monthly lodgements.
Put the year-one dates in your calendar now. Quarterly BAS is generally due on 28 October, 28 February, 28 April and 28 July. If you lodge your own return, it’s due on 31 October; using a registered tax agent usually gives you more time. The ATO’s BAS due dates page has the current dates.
Plan for the year-two double-up. When your first return is lodged, look at the bill and any instalment notice together, and adjust your monthly tax line so you’re not caught short.
Number 3: A cash reserve sized for your industry
Not many businesses starting out ask for help from day one. Once you have consistent sales in the door, reach out for guidance to learn how to budget for your BAS lodgements, reserve and overall compliance.
Generic advice says to keep three months of expenses in reserve. In practice, the right amount depends far more on your industry than on your size, because every industry runs short of cash for different reasons.
The more volatile the industry, the larger we recommend the cash reserve be. If you are paying staff, aim for 6 months’ regardless. You never know when you will have to pay out a redundancy or annual leave.
Industry | What drains cash | Reserve to plan for |
Professional services (consultants, agencies) | 30 to 60 day payment terms, gaps between projects, late debtors | 2 to 3 months of fixed costs |
Trades and construction | Materials paid before progress payments, weather delays | 3 to 6 months of fixed costs |
Allied health and NDIS providers | Claim and funding processing times while wages are due every pay cycle | 2 to 3 months of fixed costs plus at least one full payroll |
Retail and ecommerce | Stock bought months before it sells, seasonal peaks | Your next stock order plus 2 to 3 months of fixed costs |
Seasonal businesses (tourism, events) | Most income arrives in a few months of the year | Enough to cover the full off-season |
To size yours:
List your fixed monthly costs, including the minimum you need to pay yourself and any staff.
Identify your industry’s cash gap: how long between paying for the work and getting paid for it, and how long your quiet season lasts. If you don’t have history yet, ask an established business owner or your industry association.
Multiply your fixed costs by the number of months that matches that gap.
Include it in your startup capital. If you’re borrowing or using savings to launch, the reserve belongs in that number, not something you hope to build later from profits.
Case study: A small business had their administration officer managing supplier pay runs each month. She had worked in the business for a number of years she was trusted in the team like family. She had full access to Xero including the ability to update contact financial details. Typically, we recommend a two-person review/audit of payments. In this instance, the business was suddenly very cash strapped and they couldn’t figure out why. It wasn’t a seasonal business, the owner had been in operation for over 10 years and never had such a problem.
A detailed review was carried out, and we found that the admin officer had changed the supplier bank accounts for a select few to her own. Over the year, she had quietly paid herself $60,000. Only when the suppliers cam chasing their aged debtors (in this case 60 days past due), was this found out. So, the business now had to remove this employee and also find another $60,000 for their suppliers. In this case, there wasn’t enough of a reserve to work with and the business had to plan to close its doors.
Your year-one money calendar
Pull the three numbers together into a simple calendar for your first year:
Before launch: calculate break-even, decide GST-inclusive or exclusive quoting, set your reserve target and include it in your startup capital.
Month 1: set up your accounting software and add a monthly tax line to your budget.
Each quarter: lodge your BAS by the due date and compare actual sales with your break-even number.
After 30 June: review your prices against a full year of real costs, and set an end date for any launch pricing still running.
When your first return is lodged: plan for any PAYG instalments alongside the bill, and adjust your monthly tax line.
If you want to go deeper on pricing once you have real numbers, We’ve written about how to set your prices as a service business.
The bottom line
Most new businesses don’t fail for lack of customers. They run short of cash because the money plan was an afterthought. Work out your break-even price, budget for tax as a monthly cost (including the year-two double-up), and size your cash reserve for your industry before you launch. Those three numbers will tell you more about whether your business will survive its second year than any logo ever will.
This article is general information only and doesn’t take your circumstances into account. Speak to a registered tax agent or BAS agent about your situation.