Dec 162011
 

Working out the true cost of selling something is difficult – but vital

It’s vital to survival that the cost of your products is known and controlled.  If you don’t know how much it costs you to produce then you can’t be sure that you’re making a profit; many companies have found out the hard way that they have got their costing policies wrong.  Here’s how to avoid that happening to you.


Timesheets

Hard to introduce (so if you’re just starting a business use them from day 1) but vital to getting an understanding of how your labor costs are spread.

Overheads

These are things like rent, services, office staff wages, bank charges etc that are not allocated specifically to the production line or delivery of the service.  Make sure you include them all in the calculation and check regularly; little things like IT contracts can creep in at any time and raise your overhead.  Spread the total overhead over a year and then break it down to apportion a lisle to each product or service sold.

Budget

Develop a detailed budget every year and then refer to it regularly (monthly as a minimum).  Get everyone involved so that they can make a clear connection between how they act in the firm and the budget level/profitability level of the company.

Smart purchasing

Only allow 1 person to buy on behalf of the company.  This means that all purchases will be channeled through that person and they (and you) will be able to monitor what’s happening.  A single buyer will quickly get to know where the best buys are to be made too.

Mark up

On top of all your costs you then need to make sure you add a mark up; this is your profit.  Sounds simple but lots of people still forget this step.  Figures vary from industry to industry but a good rule of thumb is a bottom line (net) profit of between 10 and 15%.  Note that to achieve this you may be marking up initially by 35% to take into account taxes, bad debts, pricing errors etc.

Create a dashboard

When you’ve put all the things above into practice then you still need to measure how you’re doing and a business dashboard is the ideal tool.  A business dashboard is just like the one in your vehicle – and serves pretty much the same purpose.  As you’re traveling along you can glance down and in a moment see that everything is ok – speed, revs, oil and water temperatures, gas.  Create a similar thing for your business and monitor regularly; some things may get reported daily, some weekly, some monthly, it all depends on the business.  But the fact that you’re looking at them regularly will allow you to quickly realize that something is going wrong and deal with it.