How to get your costings right
Often, I find when I am working with a client, they have queries about why their cash doesn’t match their productivity levels and they struggle from day to day to actually even pay bills. One of the biggest killers, I find in this situation, is that people haven’t really examined what pricing strategies they have adopted in line with the way in which they operate their business.
It’s quite easy for us as business owners to look at the outside world, look at what everyone else is doing and compare and try to match our service offering cost to our customers at a competitive rate, but what we forgo in these situations in the dangerous example that we haven’t actually examined internally the impact of charging that amount to our clients on our business as a whole.
What do I mean by this? We need to examine the actual cost inputs of our business, not anyone else’s business, to actually deliver that service or product to our customer. In examining those costs, it allows us to see what we call our breakeven point. Such a traditional term in the financial arena that is overlooked for the most part. Now examining your breakeven point is not this weird and wonderful calculation that requires an accountant to do it for you. What it is, is a genuine and truthful understanding of all of the costs associated with delivering that service offering or product. Now when I say ‘all of the costs associated with delivering that service or product’ I don’t just mean the ones that are the most obvious. What I do mean, are the ones that are probably the least obvious you need to include as well such as, your time and any of fixed costs that you have in your business.
In understanding your genuine cost structure, you have to highlight several different points
What are my labour inputs?
What are my product components?
If they are product components in the service industry, you have to think of the real costs of the service and not just your time and work backwards from that.
I recommend to a lot of clients to just have something like a simple spreadsheet, it doesn’t need to be a costly or difficult exercise. A simple spreadsheet that allows you at any point to be able to just input the costs for each and every service that you’re offering and this will give you your genuine bottom line/breakeven point that you actually need to cover your costs. Once you understand that you then add your margin to it, and it’s as simple as that.
But don’t sell yourself too short. If it appears too high to go to market with, understand that one of two things have to change. Either your attitude towards that amount has to change and that you adopt it in your business and you wear it and you understand the impact that it would have competitively to the other pricing structure of everyone else or you review the expenses or the cost inputs in actually delivering that product or service. In reviewing the cost input, you could contact some of your suppliers or you could review the amount of people it takes in terms of hourly rates to actually deliver that and build in some efficiencies. Have a look at those value added or non-value added activities that don’t necessarily need to be put in and therefore reduce your costs, therefore reduce the breakeven point, increase your margin and make some profit.
More often than not I see that business owners neglect a lot of the real obvious costs because they feel as though they are being absorbed anyway by the business. But if they’re not genuinely being absorbed and built into your costing structure you’re going to find that you’re actually going to be chasing your tail financially. Therefore, your cash won’t match what you’re actually bringing in and what you need to be paying out.
In addition to this, on top of examining those internal costs and how they relate directly to that product or service offering it then becomes about understanding the margin that you want in terms of your business. Now this is the point at which you get a feel for what everyone else is doing and at the end of the day you have to understand that your cost structure may be significantly different to those of your competitors and therefore you may have to be a little bit higher in your delivery of the cost of your service or product to your customer. Don’t be afraid of this, because if you’re afraid of this and you price it wrong, you’re going to go out of business so much quicker than you thought because, cash is king. Without it, you’re just not going to be able to pay the bills to keep your doors open.
A simple exercise, a simple approach … yet an extremely important process for peace of mind.
