This is the first in a new blog post series by business consultant and Dream & Do friend Marcella Merck from Merck Business Consulting.
One main concern for businesses starting out is working out their costs. The first step, particularly for anyone manufacturing a product - any product, from candles to clothes - is to sort their direct from indirect costs.
Direct costs (also known as Cost Of Goods Sold [COGS]) are all the costs, as the name suggests, directly tied to the making of the product. If you can’t make the product without it, count it!
- Direct labour costs (labour costs spent making the product, not sales not book keeping etc.)
- Direct energy / water costs (power costs directly tied to the production stage, so not office lights for example)
- Every ingredient/part involved in the making of the final product.
Indirect costs/expenses include:
Everything else... these are the costs that you would incur regardless of whether you made anything at all.
- Monthly power bill (NOT directly linked to production power costs)
- Administration costs.
Another key concern business owners have is how to manage their costs, so identifying them clearly as per the above outline is the first step to making this much easier.
Knowing that these costs specifically include all your direct costs means you can now focus your efforts on reducing your input costs to bring down the costs per product. You can make judgement calls around how much you are willing to compromise on quality parts/ingredients or maybe even out sourcing the manufacturing of a particular part to save on your own production costs.
Controlling Indirect Costs
Again, knowing which costs you are going to have to pay regardless will help you focus your efforts on making decisions around things such as office space and location and toys. Two big temptations when you start your own business are to say:
- Everything needs to be the best if we are to be the best! This however usually means expensive and start-ups don’t have this luxury. Be aspirational definitely but don’t over reach be realistic in your approach to what you need.
- I want to make this the best place to work ever! Again this usually means expensive as people get carried away with filling their space with toys to keep staff happy and motivated. Worry about keeping them paid to start with, the rest will come.
Look out for next week's post by Marcella Merck, all about "cheque shock". Contact Marcella through her website www.merckbusiness.com.