Further Budgeting Ideas - Cost of Sales


Further thoughts have arisen regarding accurate and successful business budgeting.

Writers, editors and other service providers, this additional post on the topic of accurate and successful budgeting is especially for you. It will also assist owners of other types of businesses who also provide a service, over and above their products which they manufacture and/or sell.

I will soon be posting a tutorial/article in this blog on correctly costing a business’s products; whether as a manufacturer or retailer, or wholesale distributor, or a service provider. While channeling my thoughts along these lines, I recalled a vitally important aspect of budgeting, i.e. Cost of Sales.

How much does it actually cost to materialize the Sales figure envisaged in the budget?

One might in error believe it to be simply how much the products/services cost at the time of purchase. This is a pure fallacy, as the cost of the products is only one part of the total Cost of Sales. Consider the inclusion of the following.

For service providers who charge per unit of time

The most important item not to forget for those who do timed specific work, where a business, or a person, charges a rate per hour or part there-of, is to never forget that the time it takes for the business or the person to do the work bears a cost.

Imagine a writer needs to calculate the cost of writing. Firstly, the writer must calculate the amount he/she wants to earn in a month.

“Time is money”.

Let’s say the writer wants to earn $4,400.00 per month in terms of remuneration and needs to cover business expenses of $1,000.00 per month for travel, Internet services, stationery, etc.. The writer would have to calculate how many hours are available for writing in a month. Twenty-two working days per month, 8 hours per working day, equals 176 working hours per month.

Costs per hour calculate as follows:

The writer’s time cost $4,400.00 per month $25.00 per hour (after agency commission)

Business expenses $1,000.00 per month $5.68 per hour

Total income needed $5,400.00 per month $30.68 per hour

The writer would need to charge at least $30.68 per hour to break even in a month. Therefore, the writer would need to charge $31.00 per hour, or higher, for writing services.

This being fact, another aspect of the importance of costing the service is where the writer might be offered a writing project at a fixed value. For example, to write a four hundred and fifty words article for a flat fee of $25.00 (not per hour), is offered to the writer. This would be feasible only if the writer could complete the project in about 40 minutes, otherwise he/she will not cover the running cost to the business.

Thus, he/she will not recover the total cost of the service provided, and the business would suffer a loss. Or the writer would have to accept earning less than $4,400.00 in that month.

For example, If the article takes one and a half hours to complete, the income would be $25.00 and the cost of the service would be $45.34 ($30.68 X 1.50 hours), producing a loss of $15.34 for the job.

Take heed, this is how writers, editors, proofreaders, and other service providers suffer; often without even realizing it.

For retail businesses

Costs of products.

Commission on sales.

The delivery and courier costs of the goods.

Damages whilst in storage and in the shop.

Pilfering whilst in storage and in the shop.

Downward valuation – or depreciation in value of aged stock.

Spoilage of stock.

One’s own delivery costs to customers.

For Manufacturers

Costs would include the standard production costs:

Raw materials

Direct labor

Direct overheads

PLUS

Variances to standard costs.

Commission on sales.

Other costs, as mentioned above for retailers and service providers.

In summary, this step in the budgeting process is vitally important and I strongly suggest including it when budgeting.

Wishing everyone every success in their business venture.

Vaughan Jones


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