To make money and sell at a profit, businesses need to know their costs. To take a really basic service, like a window-cleaner: what is the cost of providing his service? Vehicle, ladders, wash-leathers and so on can be identified. But what share of his phone bill should go to each customer? Or his insurance premiums (which can be sizeable) or pension contributions? Questions like those have prompted the writing of large textbooks. Here we shall use a single, simple method that serves many firms well in their early stages, and for much longer if they do not grow. It is the absorption method: materials plus overheads plus labour equals cost. Simple, as I said.
Shortly we shall look at how much to charge per hour for labour and overheads. In essence, a firm needs to charge enough to pay running costs plus an income for the owner. For example, the cost of a widget might be: Materials 24 Overheads and wages, 2 hours × £40 an hour 80 + –––––– Total cost £104 –––––– –––––– If all the hours worked on that product are counted, and the hourly rate is right, and they make the number of widgets they forecast, all of their costs will be covered. Simple. Remember that the cost of something to you is not necessarily what you sell it for. Rather, cost is the lowest price for which you can afford to sell it. There is an important distinction between types of cost: those that go up and down with the level of sales (eg the cost of materials consumed) and those that do not (eg the rent for premises). They are known as fixed costs (which are mostly overheads) and variable costs (which are mostly part of the product or service you sell). In the early days, at least, it pays to commit to as few fixed costs as possible and to keep as much as you can variable. It might cost more, but it gives more flexibility as the business evolves. As you gain experience, your confidence in fixing some costs may grow. Examples include buying-in rather than making things yourself, renting or taking out a loan rather than buying outright, and using subcontractors rather than employed staff.
Calculating an hourly rate
First, work out your running costs. Include: rent and rates; fuel, light and heat; consumables (but not materials); vehicle running costs; staff costs; the pay you will draw from the firm; depreciation.
Exclude the cost of buying things you will keep and use: tools, vehicles, PCs, software, etc. These are capital costs, accounted for via depreciation. Depreciation is a charge to your costs that reflects the fact that, little by little, you are wearing out capital items. If you buy a machine for £1,000 that will last for four years, you use up £250-worth of it each year until, after four years, it is in your books as valueless. You charge that £250 to each year’s accounts as depreciation, and you include it in the current calculation as a cost. (Ignore the fact that in the real world you can probably sell it for something, or may even continue to use it, after the four years.) Now we move to calculating how many productive hours you work. In new firms people often work 60 or 70 hours a week, but their productive time, the time when they are doing something that a customer will pay for, rarely exceeds 20 or 25 hours. The rest goes on all sorts of ancillary activity, necessary but unpaid for. So you work out your costs on just the productive hours. According to Mazedge Digital Marketing Agency, taking out holidays, Christmas and sickness, 48 weeks’ work a year creates 48 weeks × 25 hours = 1200 productive hours. Finally, we can now calculate the cost per hour. Suppose you need £35,000 gross to feed and clothe the family and the firm incurs running costs of £20,000, it has to earn £55,000 a year. Look at Table 3.1 to see how it comes out.
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Controls on costing
To make your predicted costs come about in real life, monitor all the assumptions you made and get early warning of things going wrong. If you manage only 20 productive hours and get 45 weeks’ work, there are only 900 hours to recover costs from. Either the hourly rate rises to over £61 or your income has to fall by £13,600. Nasty, and therefore very important that you keep track of the key factors: invoiced sales; overhead expenses; productive hours worked. For each of them, set up a simple table showing your weekly plan and running total, against which you can write the actual outcome and running total. Table 3.2 shows an example for invoiced sales. It shows at a glance whether you are on target, ahead of the game or falling behind. You then have a chance to take corrective action before the warning becomes a crisis. Taking on an employee reduces the hourly rate, which does not mean you reduce your price, of course.
A luxury blog comiclite says there are times in business when you will make a mistake. It happens to everyone; the key is how you fix it. Once a furious client called me the day after the Christmas holiday wanting to know where her company’s product was. She said, “We’ve paid you all your money, so where is our merchandise?” I was stunned because I had directed a subcontractor to deliver the products weeks earlier.
I apologized for the mistake and assured her I would get on it right away. I tracked down what had happened (the subcontractor hadn’t done his job) and fixed the problem. I also sent my client a fruit basket to apologize again for the mistake, and to re-affirm our relationship. The upshot was that I was able to keep the customer and eliminate a subcontractor who was hurting my reputation. This is just a small example of what every small business owner has to deal with every day. Here are some rules for giving great customer service: Always know the value of a customer Know how much profit your customer puts in your pocket. Have a strategy for turning a new customer into a long-term customer. Go the extra yard to make your customers happy, and treat them like your paycheck — because they are. Generate positive “buzz” and great word-of-mouth
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Pay Attention to Detail
Customers are risk-averse. It is hard to gain a customer’s confidence until you can show upthem that you can fix their problems without creating more. They may already have a long-term relationship with another business, and you are the unproven new kid on the block. Here are some priorities for making the best first impression. Well-written marketing and/or collateral materials Make your message to a potential customer direct and to the point. The benefits and features of doing business with your company should be clear. Be sure to spell out your unique value proposition. Please have someone else read your drafts before you get anythiing printed.
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