Thursday, November 13, 2008

Costing and Pricing Navigational Tips 3

Last week we got to the point where we were going to list the things that contribute to the cost of production – so let’s take a look at what are called our ‘overheads’ first. These are the things that we must pay even when we’re not producing:

Let’s look at a list of possibilities - not necessarily exhaustive –there may be more than I’ve put here but you’ll get the idea:

1) Rent
2) Studio Furniture, fittings, equipment, vehicle (Hire Purchase, loans, etc)
3) Phone & Internet
4) Electricity
5) Water
6) Gas
7) Salaries
8) Administration
9) Advertising and promotion
10) Insurance
11) Savings

For instance even if you work at home, you pay rent for your business – you can say, okay, I use this little room for my work – it’s 100 sq ft of space. How much does it cost you? Well, do you rent the property or pay a mortgage? What’s that per month? Say it’s $1500 per month and the total sq footage of the house is 1000 sq ft – then 1 sq ft costs you $1.50 per month – your 100 sq ft studio space costs $150 per month in rent.

Proactive Costing
Now, if you want to be proactive and consider moving into a studio space say in a place in town, you may want to call around and find out what going rental rates are – if, for instance, places you’d like to be cost $3.00 per sq ft, then you would need to consider that in your costing. Why? If moving into a new, more expensive space – or any other cost element is likely to change upwards in the near future, then you cost at that rate, so you don’t run into problems of under-costing and needing to raise prices when the change is made.
Furniture, Fittings, Equipment, Vehicle
These are in some cases fixed assets – but for simplicities sake, let’s assume we know roughly how long each will last and how much we’re paying for them. From this we can work out a monthly cost:

An example: Your computer – you are paying (in HP including all the charges) $3000 for it. It will last a good 3 years but to be safe let’s say 2.5 years – so that’s 30 months - $100 per month.

Saving for replacing equipment
Now, if you want to be able to buy your next computer cash, you need to consider how much you need to have saved in 2.5 years in order to buy a new one…if a new one (upgrade of course!) will cost $2000 cash, then you need to save $67 per month in order to do this.

You don’t have to take this all from costing – your profit margin should be a major contributor to growing the business and can accommodate upgrading of equipment, but it’s a safe route to consider the actual replacement costs (savings needed) in your formula.

Phone and Internet
You can estimate what portion of calls are business or get an itemized bill and check one month.

Internet in my opinion is better charged for the whole service – on the assumption that if you move into your own premises you will have to pay your own bill – unlike telephone where the monthly charge for service is usually small compared to call costs and your personal and family use may be increasing your whole bill.

This is a difficult one – you could (for the fun of it!) add up the wattage of all the things you use, figure out how many hours they’re running and work it all out…or spend your time actually producing something to sell and just take a portion of your electricity bill into account.

Of course if you run a lot of electrical equipment – maybe a kiln or saws, drills, grinders, etc, then that proportion should be high and it may be worth trying to work it out – there are numerous online calculators that could help you estimate, here’s one, and another.

Water and Gas
These follow similar logic – try and figure out how much you use, look at your bill and estimate.

We worked this out last week

This is a salary cost as well as all the paperwork costs – bill books, receipt books - how many do you use a month, accounting costs, cleaning, filing….the actual costs of the items and your salary for the hours it takes you or the salary of your employee

Advertising and Promotion
It’s worth researching how much newspaper ads, magazine ads, promotional fliers, business cards, trade and retail show participation costs (another post to be). Note – even if you print your own fliers and business cards – ink, paper, are consumables so you must cost them in.

Something a lot of us omit in our lives – adequate insurance. It can seem costly to pay each month until you or someone close to you loses a costly and vital piece of equipment or their stock of goods in a storm, burglary or through accident. Cost it in.

So Far So Good?
And that should round it up for today – I do hope the detail involved in all this is useful, the good thing is that once you have a good handle on understanding how it all works, and have done a first slew of product costings right through, I find you are able to estimate costs for many other products without detailed analysis. But of course if you start a new item, then you can easily go back to your formula and be sure of what it will cost to make.

Next week, we’ll look at adding up materials and estimating production times and then, I do believe we are finally done!

Here's another quick overview that looks at pricing jewelry - same principles apply to many handmade items

Images today compliments