Understanding your business costs

Understanding the nature of your costs is critical to being profitable in business. You will need to record all expenses where they can be properly analyzed. I would recommend a simple book and excel spreadsheet.

Some costs are capital in nature and are usually incurred at the start of the project. Things like land, equipment, vehicles, buildings, etc. They are usually significant but a one off. You need to estimate how much you will need to set off your project to a good start.

Some costs are variable and depend on the volume of business you’re doing. For example raw materials depend on the production output. Fuel will depend on the mileage.

Other costs are fixed in nature. Things like rent and salary. Whether you’re making sales or not you have to pay rent.

Each unit we sell has a cost. This is basically the production/purchase cost of the item. So you have to know your unit production cost. The difference between the selling price and production cost is your gross margin. Whatever the case make sure your selling price is higher than your production cost.

We also have selling/marketing costs. So things like adverts, posters, samples, activation, etc. will fall here.

Payroll costs include salaries, wages, bonuses, taxes, etc. These costs make up a significant portion of overall costs for most businesses and should be controlled. Business owners should pay themselves a salary to avoid encroaching on business finances.

We also have general administrative costs like fuel, stationery, power bills, insurance,  etc.

A depreciation cost is estimated for the capital expenditure you incurred at the beginning. You would also need to provide for bad debts and inventory wastage.

We also have financing costs like interest expenses in case you have a business loan. We have to pay the tax man to keep him happy as well.

Hopefully you have some money leftover as a business profit from which you can then pay your shareholders a dividend or reinvest in the business.

If you don’t understand your business costs you are really just gambling away your hard earned money and wasting precious time and effort.