Production Of Your Goods Or Services Is Expensive
Obviously you are aware of what expenses you are incurring with operating your business from day to day.
I thought I would give you a brief rundown of the types of expenses again to refresh your memory.
Direct costs related to producing goods or services can be reviewed based on type of business, namely Manufacturer, Distributor/Retailer and Service provider. Here is a brief look at what these are:
For A Manufacturer:
A manufacturer’s costs could relate to purchase of raw material, goods that are work in process and finished goods, as mentioned earlier.
In relation to raw material, it is mandatory to keep the costs as low as possible, since this is the basis for the profitability of the sale. In addition, the supplier must be in a position to make timely deliveries at competitive prices and be able to do so continuously. The manufacturer must also shop around to find suppliers who can be cost effective. A periodical vendor audit is a good idea.
Work In Progress:
For work in progress, we must take into account cost of storage and labour until they are converted to finished goods.
This relates to warehousing costs where inventory is created until stored or disposed of.
For A Distributor/Retailer:
The costs here relate to warehousing or stocking space for the resale of products, until sold. The availability of stocks can make the difference between making a big sale and losing it due to lack of stocks. Seasonality of products plays a role here as the shelf life will vary for such products. Therefore, sometimes the distributor or retailer may have to compromise on profits to simply dispose of inventory.
Distribution networks set up to cater to customers at various locations to save on logistics and excess stocking enable retailers to use the space available to display their products. It also lets them buy at lower prices and deliver faster.
For Service Providers:
The costs here relate to capital equipment and inventory depending on the kind of service being provided. It makes sense to have reliable and cost effective suppliers on hand when special needs may arise for certain contracts, so that inventory can be minimized.
Administrative Expenses Related To Sales:
There are several administrative expenses involved, right from the time the product is manufactured. For manufacturers, distributors and retailers, the typical costs are sales and marketing salaries, bonuses, incentives, commissions and expenses. The sales staff is usually motivated to bring in maximum sales by being offered incentives and bonuses. There is a sales quota assigned to the sales staff that has to be met in order to keep the job. Items sold with a low margin have lower incentives than items with high margin. Whatever the incentive, whether large or small, it needs to be taken into the pricing.
In this regard, we must also include administrative expenses like credit, collections, accounts receivable, human resources, purchasing, customer service, shipping and receiving etc. because all of them impact sales in a big way.
For service providers, since they need special training to provide their services, training costs come into the picture. Also in the picture is the cost of losing skilled employees, as they must be taken care of with adequate compensation to stay.
I hope this post helps you understand some of the costs associated with running your business. Keep it up!