How Much? Don't You Know?
By Andrew J. Birol, President, Birol Growth Consulting, Inc.
Twenty-five years ago, my finance professor gave our class a test called “How Much?” and asked us to compute the cost of an item one factory produced for another. I attacked my blue book ferociously, explaining my logic for costing and writing on for extra credit by giving alternatives. Sadly, I got a “C” because I did not give the one thing he asked, an actual cost for the item.
300 months and clients later I will ask the same question of all of us. As business owners do we get an “A,” a “B,” or a “C” when it comes to knowing how much our product or service costs? Take this test to see how well you do. On a scale of 1-10, with 10 being the highest, circle your answers to the following questions.
I know my:
- Total direct labor and material costs. 1 2 3 4 5 6 7 8 9 10
- Average or standard direct labor and materials by market segment; product family or major services. 1 2 3 4 5 6 7 8 9 10
- Actual direct labor and material costs by individual customers, orders, services or items. 1 2 3 4 5 6 7 8 9 10
- Monthly fixed costs and break even production level of goods or services. 1 2 3 4 5 6 7 8 9 10
- Overhead expenses are fairly allocated to every sales order and proposal to maximize profitable sales. 1 2 3 4 5 6 7 8 9 10
- Cost of finding, keeping and growing a customer. 1 2 3 4 5 6 7 8 9 10
- Pricing, purchasing, staffing, and servicing decisions are based on real facts and current information instead of emotion and old data. 1 2 3 4 5 6 7 8 9 10
Add up your answer to the seven questions and grade yourself.
If you scored 60-70, give yourself an “A!” Congratulations, you have true costs, know how to apply them on an individual customer basis and do so in growing your business. Now you can go on and really exploit your knowledge by:
- Reducing or increasing prices to increase your business with individual customers.
- Determining the product lines or services that have to be profitable on their own and the ones that can be loss leaders or impulse items.
- Focusing your staffing, materials, inventory, and purchasing departments on saving and making you more money where it matters most.
If you scored 50-60, give yourself a “B.” Yes, you have a costing system and while it may not be correct on an individual basis, you do have some structure and discipline in your pricing and investment decisions. Now it is time to bring on a financial/marketing analyst to dig into the average numbers and start rooting out hidden opportunities in your business like:
- Creating a structure of product parents, grandparents and children to bring order to what you make and sell.
- Assuring your breakeven numbers are being used in establishing your monthly pricing.
- Driving your financial, materials, purchasing and staffing functions to manage their costs for profits.
If you scored below 50, you get a “C” and need a wake up call. Your costs and your subsequent decision-making is flawed. Where you think you are making money you may not and vice versa. Get started by:
- Making your business run by the numbers. Hire a plant accountant or business manager as soon as possible and uncover your direct materials and labor costs to forecast your overhead.
- Developing a manual costing system before you invest in a CRM or ERP system. What doesn't work manually will not work when it is automated!
- Changing your peoples' thinking on this, or change your people. Regardless of whether your margins and prices are high or low, you cannot manage your business if your people are not managing its costs.
Imagine the day where you can confidently answer all your customers', sales reps' and inside staff's questions to maximize your business' profits. You will, only when you do know… How Much!
Articles by Birol Growth Consulting are © copyrighted and all rights are reserved. However, articles may be reprinted with prior written consent if attribution is included as follows:
© Copyrighted by Andrew J. Birol, President of Birol Growth Consulting, who helps owners grow their businesses by growing their Best and Highest Use ®. Andy can be reached at 412-973-2080, by email at firstname.lastname@example.org, or on the web at www.andybirol.com.