Chapter 2 – Financial Control – Rule your money
This is part of the ‘How to’ coaching series. An ongoing series of activities to make your business successful. Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.
Activity 11 – I know my daily/weekly/monthly Overhead costs
Do you know how much your business is costing to run?
It is easy to wait till you get your bank statement at the end of a month and see if you had more income than outgoings; but that doesn’t tell you the reality of how much your overheads are.
Many clients get quite a shock when we work out how much it costs per ‘hour they are open’ to run their business. Imagine a shop or cafe, how much per hour does it cost to be open verses being closed?
Think of the costs incurred during opening times. For instance, lighting, heating/cooling, any cookers, coffee machines, lit display stands, the products you sell, the services you provide; and that’s before the staff costs, insurance, rates and much more.
For businesses producing products, there may be significant machine and tooling costs. Also, long lead times from when something is produced, till it is sold, and then payment received.
Why would it be useful to know your costs? Let’s keep it simple. Are your takings more than your outgoings?
Apart from knowing your costs verses your takings, it is a great way to analyse which are your profitable opening times. Some businesses choose their trading days and resource allocation based on customer footfall.
Some businesses are season driven, hence a month by month analysis will be more useful. If you know that your income will be less than your outgoings at a particular time, you may need more cash reserves to cover the temporary shortfall.
The ‘How to’ bit:
Work out all your outgoings for running your business to an hourly rate. i.e. take your annual insurance cost and divide it by how many weeks/hours you are open for business.
For those providing a service out of a home office, base the calculations on how many hours a week you work (track your actual hours for a month and take an average).
For those starting off, decide how many hours and weeks you choose to work. Remember to be realistic as to what you can achieve. You will need to account for holidays and any non-work days. Work out your average hourly income based on the previous year’s trading; or forecast of your expected income.
When you know your numbers, you will have a powerful tool to assess how well your business is doing, and if you have a profitable business. Also, how much operating cash you need at any one time to cover the costs.
If you’d like help with working out the overhead costs for your business, follow this link and Contact Us…