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 18 – We understand and have calculated the true cost of each of our products/services.
Do you know which are you best sellers? Do you know how much profit you make from each? Are you actually making any money at all? Or are you making a loss? Are you paying the customer to buy your products?
It is all too easy to look at competitors and think you need to price your products or services accordingly.
How can you know how much to sell for unless you know what it costs to produce, procure or provide your products and services?
I’ve often heard clients say, ‘but it’s so complicated!’. Well the process itself doesn’t need to be. It can seem daunting, say you were one of the big 4 food retailers, there are lots of sales lines – I know of one company that holds 64000 lines (individually priced items).
It doesn’t matter how many ‘lines’ you stock/sell, it’s the same process.
Let’s take a widget, that often used example. The widget has materials you need to purchase; plus specific manufacturing costs. This gives you the direct costs. Now you need to add the operations costs. This is the bit most people struggle with at first. It’s not that difficult, you just need to decide how you are going to slice up the operations costs to suit your business.
It is about consistency. Apply the same rule across your business.
The ‘How to ‘bit:
Make a list of the costs that are directly attributable to the product/service e.g. cost of materials, shipping to you, storage. Costs for providing services may be client materials (e.g. – printed workbooks), expenses – travel, refreshments.
There could be more costs, you will need to look at your specific business’ costs.
Then work out how you will slice up the operational costs. For example, you could calculate it on an hourly basis. Add up all the expenses of running the business annually, such as salaries, rent, rates, equipment and tools, phones, electric…. then divide this by the hours you are open for business.
This will give you a number that you can add to the direct costs. When split down to the level you are looking at, this is compared to the sale price you actually receive.
You will then see if you’re making a profit for that product/service.
If you would like help setting up your own process, follow this link and Contact Us…