Do You Know the True Cost of Running Your Business?

You might think of the cost of your business as “sales minus purchases” – and you would be right, for the most part. The question is: do you keep track of all the things you do in and around your business which do not bring you an income, but are still essential pieces of the puzzle?

Do you cost in opportunity and attending meetings or networking events? Most of us will need to do this in order to grow a successful business but time, as they say, is money.

Business is not just sales; it’s everything around sales as well, and it is important to capture all of this information so that you know exactly where you stand financially. I heard this week about an events compancy where the leader, founder and owner has the potential to run a great business but time and again products used to style events are gifted to the customer creating more work for her staff and less profit for the event. Learning to sell, to recognise that every action has a cost, matters hugely to your profitability.

I’ve published several blogs lately about financial reporting and the figures that you as a business owner should have in your hands each month. One thing that is really important is looking at these extra costs around the edges of your business, and questioning how many of them are really necessary or viable.

For example, you may attend every networking meeting available locally, justifying this with the fact that they are outside of normal office hours and so don’t take away from the time you spend at your desk each week. But how many of those networking meetings actually have other attendees who would be your potential customers? Or are you just going to a breakfast meeting with a free bacon roll and having a chat about current affairs to the same old faces each week or month? Take a cold, hard look at the networking you are doing, and see if it is actually paying off at all. You may think it doesn’t take away from your time in your business, but I’m willing to bet that on the days you go to these meetings you are a little later to your desk, and it maybe even takes you a little longer to settle into what you’re doing, worse still, you might instead have had a more productive one to one with a prospect or closed a deal?

Many of us will start off going to meetings and events not only to network but also perhaps to learn from speakers etc. Again, this is all well and good – but it is important to really evaluate how much you are actually getting out of this, versus what you’re putting into it in terms of fees and your valuable time. If speakers are reinforcing what you already know, that can be energising and good for breaking into the often lonely days of early start up. Irrespective, it is important to have a target for makng events of value, of learning actionable take aways and ideally aim to meet the right people in the room, not just killing the day by being polite to friendly faces.

When you think of the cost of your product, do you include things like sampling, delivery charges, gift bags, packaging, time to source information and storage? All of these will be costing you money, which may mean that your profit margin is actually considerably lower than you thought. It is easy to think of your profit as the difference between the cost price and the retail price – but that is very rarely the case. There are numerous other costs to take into consideration. Cost each line, each action, opportunity time can be averagely allocated, we have a cost for funding deals when we knew people would push 30 days terms, line items for picking, packing, any special sign off services, booking in costs…cost allocate everything and learn everything you can about your cost impacts in the manufacture of the products and you can save more.

Last week I visited a factory making a product discovering a second line of people used to apply a batch code on a product. If we move our choice of where to allocated the code it can be done in the fully automated production, saving ￡0.004 per 1000 units. That sounds negligible but these things all add up over time.

Some companies have to cost in extra staff training or perhaps special security approval processes if you sell air side. Unknown costs can kill deals. You should know exactly how many days or hours it takes to fully train a member of staff, and how much that is costing your business, indeed this point alone underlines the value of staff retention. Taking on new staff can be a costly business, and you may find that when you look at all of the costs involved, it is actually cheaper to invest in the people you already have, possibly improving systems automation, rather than risk them leaving, and have to employ and train up someone new. The value of staff experience can barely be priced as a company matures, sadly something I think leaders are not quite valuing these days through great engagement practices.

If you are in a service based business you may be reading this thinking that none of this applies to you; you would be wrong. Think for a moment: what is the hourly rate you charge to your clients? The hour you spent at that pointless networking event last week should be a considered a cost to your business at that rate, as it is an hour you were not able to earn. Similarly, things like the cost of running your office, stationery, telephone bills and so on should all be taken into account. Have you allocated costs of marketing material? Do you have to custom create a presentation for delivering a speech; have you to do research about a client’s specific areas of business expertise? This is all opportunity cost and time has a price. Do you even know your own hourly rate? Is the cost of your expertise costed in?

You might think I am being overly pedantic with my comments here, but could you really run your business without heating and lighting? Without an internet connection? Could you sell products in your shop without adequate storage space, or without paying the delivery charges to get them to you in the first place?

While none of these are direct costs, they all play an important role in deciding whether your business is commercially viable and profitable. If you don’t keep a close grasp on these costs your accountant may have an unpleasant surprise for you when it comes to filing your annual return.

I know that things like time spent networking and in meetings are not included as costs in your company accounts at all, but they are still something to keep an eye on. It is all too easy to spend time socialising but call it networking or “meetings” and then find that actually, the business is not profitable. Better to be overly strict with oneself from the outset and constantly evaluate where time is being spent – and wasted.

The true cost of running your business should be the sum total of absolutely everything you spend and do to support your business, as well as the cost of your product. If you have a firm grasp of this figure, you will be able to steer your company through most situations, and to keep your running costs as low as possible.

This was originally published on LaraMorgan.co.uk.