Consider All The Costs Of Producing Your Product Or You Could End Up In Trouble.

How much does it truly cost to produce your product (or service)? Such a seemingly simple question can often become a complex exercise for small business owners. And the consequences of not truly understanding your costs can be devastating.

One of the most important things that a business owner does is determine the price at which to sell his/her product. The proper way to set a product price is to essentially double the cost that it takes to produce the product (it’s a bit more complicated, but that is the general idea). So it becomes essential to understand what it costs to produce your product. Underestimate your true costs, and you will set your prices too low…and quickly run out of cash.

Overestimate your true costs, and you will price your product too high…and send potential customers running to your competition.

Here are a few of the costs that you will most likely incur. Some are more obvious…and some are things that you may not think about immediately:

Raw Materials: If you are producing a physical product, this is probably the first cost that comes to mind. Think of the eggs, sugar, and flour for a bakery. For a business that resales product, by the way, this includes the cost of the products that you resale (e.g. candles in a home decor retail store).

Shipping & Taxes: If you do purchase products for resale, make sure you include the cost it takes for you to receive the product, and any taxes you have to pay upon receipt. For example, if you import alcohol from Europe, you will incur shipping fees and import taxes. These extra fees are considered part of your raw materials cost and need to be considered when pricing your product for resale…otherwise you are not truly earning the margins you need.

Direct Labor: For services, your raw materials cost comes in the form of human labor. For products, you may need to incur some human labor to transform your raw materials into a final product. In either case, take the time to understand exactly how much in wages you need to pay to produce your product or service.

Your Time: How much time are you putting in to creating your product or service? This is the most missed…and hence hidden…of your costs, and yet it can be your biggest cost. When you are in the beginning stages of your business, you may be wearing many hats – producing your product; selling your product; managing your business; etc. Learn to split out your time, and find out exactly how much time you are spending on producing your product. Then assess a dollar value to that time, and factor that into your costs.

And here’s a bonus tip: If you ever feel that your business is not generating enough profit, it’s generally because you are not charging enough to your customers…which means that you don’t have a strong understanding of your costs. This tends to be the root of all business problems.

Take the time to uncover these potentially hidden costs, and understand what your true costs are. Your business’ health depends on it. And of course, if you need help, then schedule a free consultation with us and let’s chat!