An integral part of your business planning will be to define your working budget and consider your product or service pricing and cost control systems.
Cost control is a common issue for small business. Keeping a balance is important.
To keep things simple, small business owners should apply a basic principle with their pricing and control system of breaking the costs in three categories: Goods Sold, Fixed Costs and Variable Costs.
Costs of Goods Sold
Generally speaking, these are the costs that are directly related to producing what it is you sell. For example lets assume Company X incurs the following costs to produce a hydraulic hose:
Swage Ends $10
The total of $80 to produce the product is the direct expense to make one item. Now if the raw material price never changes it could be reasonable to calculate the total costs of goods sold for any period by multiplying $80 by the total items produced.
Service based business’s will have labour as their direct costs.
Ways to control your Costs of Goods Sold
Evaluate your supply contracts on a regular basis to negotiate discounts or special rates on large supply. Keeping regular contact with your suppliers will enhance your business relationship.
Make attempts to minimise wastage by improving your efficiency of practises and procedures. These systems will deliver results for your pricing and cost control efforts.
Eliminate stock with a low turnover rate. Don’t overstock, especially food and beverage business’s where expiry dates and refrigeration costs can have implications.
Fixed costs relate to the total expenses your business incurs as a result of being in operation. This is includes your Startup costs and ongoing costs. These include salaries, rent, insurance, accountancy costs etc.
Ways of Controlling Fixed Costs
When establishing your business, plan your required space required to effectively operate your business. Research for suitable sites and keep in mind your growth potential. Minimise your rent by only leasing a premise that is a size fit for your business.
Research and negotiate your finance options carefully. Plan your required ongoing cash flow requirements and have suitable funds available.
Outsource to keep staff costs to a minimum.
These are your business costs that vary depending on your production volumes. They will rise as production increase, and fall as production decreases. This category will be the priority for getting your pricing and cost control systems in place. A high percentage of business’s fail due to massive strain on their cash-flow when they experience surges in production levels.
Ways to Control Variable Costs
Become more efficient with your staffing requirements.
Eliminate un-necessary administration items and improve the efficient of operating procedures.
Purchase raw materials from direct sources, eliminating the intermediaries.
Again keeping a balance of costs is important. An increase in sales can lead to an increase in production costs, placing pressure on cash-flow requirements. In contrast though, cutting cost aggressively can lead to an inability to produce your product effectively.
Let me know your thoughts on pricing and cost control, and the strategies you’ve implemented to improve your profit margins.