Cost vs. Price vs. Value
What does it cost your company to create customer value and make sales?
The costs associated with the operation of your business, whether you are a manufacturer, a retailer, or a service provider, has to be known, accounted for, and is part of the price you charge your customers. Rephrasing this another way, the price you charge your customers must include the costs to operate your company to produce and sell your product or service. If you do not charge enough to your clients to cover these fixed and variable expenses, you will soon go out of business. Also, costs do not take into account any profit for the company. How do we figure out what it costs us to run our business? How do we decide a profit margin? How do we measure our results to see if we are gaining a profit over our break-even point?
The connection between your company’s revenues and expenses is essential to understand when performing a break-even analysis to answer the question, “How much in revenues do you need to earn to cover all of your expenses?” The U.S. Small Business Administration – SBA has a good resource for performing a Break-Even Analysis, including a free calculator here. If you need help determining your company’s fixed and variable expenses and tracking your revenues, we can help you get this sorted out. We also can assist you in using the Break-Even formula – Fixed Costs ÷ (Price – Variable Costs) = Break-Even Point in Units. Give us a call to schedule a free half-hour consultation.
The Startup Company
For the startup, you will need to rely on industry standards to create your cost analysis and profit margin. You may have a leg up in this process if you are coming from the same industry with a level of working experience. If not, you can seek assistance in calculating your potential costs and profitability by creating projections and suggest checking out and utilizing these resources first.