When you are running a business whether a new company or a well established one, getting the costing of your products or services costed correctly is crucial to your success.
Service Companies
Creating the Sales price.
Your main component of cost is going to be heavily on labour. You’re going to have to make sure that not only have you covered your labour cost, ie Cost plus employers NI. Contribution to overheads plus that all important profit.
A service company needs to have a mechanism for keeping track of those labour costs versus quoting for a job, at the fingertips at all times. The easiest and simplest route to finding this out is to keep timesheets, or cost the time of every element of each procedure. You always compare the timesheet for a particular job, ie the project, versus the original sales price. This will give you an average hourly rate of the job as a whole. You very importantly need to know the average hourly cost of your overheads. Basing this on the number of hours you have available as a maximum for every member of staff.
Ie You have two members of staff, each work 40 hours per week for 5 days work. As a yearly average that’s 4,160 hours at your disposal or 347 hours per month. Your overhead for example is £2,000 per month which equates to £5.76 per hour. A cost of this nature would be labour cost per hour, plus £5.76 overhead plus % profit.
Every business and industry is different, and you’re dictated quite a lot of the time by market rates, or competitors. By knowing your average overheads and labour costs, you will know the price you cant go below or face making a loss.
Hotels have this down to a fine art. They are mainly in the services industry again heavily focused on labour costs. When you have booked your room for the night. They will know ahead of time, the number of rooms they have, the cost of an empty room, and the cost of a full room. They will have broken down in their costing mechanism
The length of time to make a bed!
Cost of cleaning the room, length of time for each room!
Cost of washing the bedding/ towels!
Cost of the tea/coffee facilities!
Heating and lighting for each room!
Your breakfast cost!
Plus a contribution to fixed overheads, and % profit
Whether your service business is hourly project based or procedure based, you need to know the cost of each element.
Manufacturing and product based sales
Again as above you are dictated to by market rates, you might be a low volume business that can charge a premium fee for your product ie Apple Iphone. Or a high volume business that charges sales at lower margins of profit but has to sell a lot of them. Ie Walkers selling crisps
When costing a product you need first know
Cost of the materials for the product!
Labour time to make it!
Cost of energy to make the product!
The more volume you make the cheaper it should be per product as you will become more automated in your processes plus you are likely to have more negotiation power with supplier costs. You need to build in a little slack as no-one or machine can work at 100% capacity all of the time. You do need to track efficiencies and always look at how you can make things better and demonstrate you are always trying to reduce inefficiencies. This is usually where profit can go down, if a business does not look to always improve its offering.
Supermarkets have just done this in the last 18 months, by offering the self checkout facility, they’ve saved both wages cost, time and rates bills.
The main thing to realise that this is not a static job to do, as you grow and develop or change your product offering you will need to keep monitoring these costs, or you could end up working twice as hard, for a lower gain.
Always be one step ahead.
This blog is intended for information only, you may have other suggestions of your own. Please treat this as a guide only.
