ASSESSING YOUR CURRENT AND PLANNED PRODUCT/SERVICE OFFERING
A key consideration for any business is how much profit it is generating from a particular product or service. One tool to aid a business in assessing the profitability is a cost calculator.
SO WHAT GOES INTO A COST CALCULATOR?
Identify all materials/ingredients that go into each product and accurately access the quantity of each.
Identify the staff involved in producing each product – know how much of your production employees time is being spent on producing the product.
What other costs directly relate to your product? Packaging, labels, shipping costs, potential levies or charges etc.
Identify all materials and goods consumed as part of providing your service.
Identify the staff time going into providing the service – know how many employees and how much of their time is required.
What other costs directly relate to providing your service? Use of motor vehicles, equipment, fuel, other travel costs and subsistence etc.
The key to successfully assessing the above is a very useful cost calculator which simplifies the assessment process.
WHAT DOES A COST CALCULATOR TELL US?
Using a cost calculator, a business can truly understand the profitability of its products and/or services. It enables businesses to negotiate better purchase pricing, more favourable payment terms with suppliers and strive for improved efficiency in providing that product or service. It aids a business in making tough decisions surrounding the future of an existing product or service and in assessing a potential new one.
MITIGATING RISING COSTS
The most efficient way of managing costs and mitigating the effects of inflation is by setting out key responsibilities within your business i.e. one team member manages purchasing and ensures the business is getting the best deals. Purchasing the right quantity of products at the right time is critical:
Saves tying up too much cash in stock.
Keeps a focus on finding the best deals.
Manages relationships for the long-term while keeping pricing as competitive as possible.
In terms of utilities, there is still cash being left on the table by many businesses. To take one example, and while it might sound like chasing cents, the reality is that some businesses are paying between 38c and 62c per unit for electricity. For a typical business using 10,000 units per year, that is a potential €2,526 difference. Using a price comparison website will make the review process very straight forward and businesses can assess their phone, electricity, gas and insurance costs easily.
The cost calculator can aid a business in assessing the impact of inflating costs of sale which will enable better decision making on product/service pricing. Many businesses have absorbed inflated costs of sale and been reluctant to pass on the full extent of those increases to customers, particularly in a price sensitive industry. The reality is that this has a significant impact on profitability. Having that information at an early stage allows a business to renegotiate pricing with suppliers and also seek to implement cost saving measures.
One area that many businesses struggle with is the administration and accounts function and making it work better for them. We find ourselves now with a host of different accounting software providers. Sometimes the monthly fee dictates the choice of software for a business, however, the key consideration should be automation and efficiency. Some examples are:
Bank feeds that automatically download all banking transactions.
Payroll integration that will automatically import the payroll information.
Invoice capturing to allow the ability to quickly snap a receipt or invoice.
Optical Character Recognition (OCR) that will automatically create employee expense claims.
Dealing with multi-currencies and ensuring that your business is equipped to deal with suppliers and customers in Britain, America and beyond.
Quite simply; the above functions improve efficiency and accuracy – the room for human error is significantly mitigated.
This article was first published in our 2023 Food & Agribusiness Report.