Consider costs and then only potential profits, says the Business Coach
Business is about making a profit. This may be an obvious statement, but it is often a concept that is troublesome to entrepreneurs who are driven by a passion for independence and believe that they can learn business skills “on the job”.
However, turning passion into profits means understanding the art of effective costing, as noted by the Business Coach who has been advising small business owners on the Standard Bank-sponsored SABC 3 series about how to deal with the challenges that typically face South Africa’s small businesses.
Clive Pintusewitz, head of Small Enterprise and Enterprise Development at Standard Bank says that proper costing is the most crucial step in ensuring that a business is successful.
“If a business owner doesn’t know what an item costs and what it should be sold for, the chances are that the business will fail. Conversely, mastering this business art will literally pay dividends for years to come.”
Knowing exactly what it costs to open a business’ doors every day requires determining:
• What rent must be paid
• The cost of electricity
• Breakages or ‘shrinkage’
• Incidental running costs, such as packaging and wrapping
• What the business stocks and the cost paid per item
• The lifecycle of products on sale
• Wages and salaries
• Space planning
All this has to be balanced with the need to stay competitive.
“Rental costs will vary and are influenced by where premises are, the customer traffic attracted and the floor space occupied. It’s important to make sure that the business is correctly placed,” says Mr Pintusewitz.
“For example, if a business sells small, low-cost items, then obviously sales volumes need to be high. This means perhaps paying more ‘per square metre’, for the higher visibility and customer traffic that can be achieved in a major centre. To compromise and reduce costs, it is important that every square metre in the shop is used effectively.”
To be added to this “fixed cost” are others including the cost of electricity and additional levies, which could include the “marketing fee” that some major centres charge for offering in-house services such as advertising and event management. Some centres also demand that a business remain open for set hours. Close early, and the business could be liable for contractual penalties.
“Get clarity on all these costs before signing for premises. Finding out about them later could mean unplanned costs and extra expenditure on wages,” Mr Pintusewitz warns.
Remember that wrapping, paper bags, tissue paper and other packaging materials that may be free for the customer, have to be paid for by the owner. It is essential that the cost of these is understood and factored into operating costs, says Mr Pintusewtiz.
“As a business owner it is vital that the lifecycle of products is included. The owner of a hardware store does not have to worry about products ‘going off’, while the owner of cake shop does, along with the monetary loss that results. The possible effect of losses due to theft must also be considered.”
Many small business owners also fall into the trap of paying high wages, because they do not understand what is appropriate within certain business sectors. “Do the research, look at the business plan and targeted sales and then determine staff wages. See what others in similar business are paying and pay the average rate,” advises Mr Pintusewitz.
Once it is clearly understood what the business will cost to run on a monthly basis, profit margins can be set and monitored. Deriving this margin means taking total costs and then working out what return is appropriate.
“If, for instance, total costs are R 10 000 a month, the owner may consider a satisfactory performance to be R 14 000, which would mean a profit of R 4 000.00 or 40%. Therefore the mark up on products would be cost plus 40%.
“The art then lies in determining what primary products attract people to the store. It often pays to discount these and sell at a lower profit margin that is competitive. Slower-moving products that are more expensive can then be sold at a higher mark up. “
Business owners also need to understand that while costs may be high, merely pricing to make a profit may not be feasible, as competitor pricing also needs to be considered. Staying competitive is the key to success. If prices are in line with competitive businesses, or are slightly lower, there is no reason for a business not to succeed.
“It is crucial that costs, finances and cash flow are continually monitored. Review key financial information at least once a month. Take immediate action to maintain profits if costs increase due to outside factors, such as higher import costs,” says Mr Pintusewitz.
To learn more about all aspects of building a successful business, consider accessing “Coach Yourself” modules online at http://thebusinesscoach.standardbank.co.za, where business issues, problems and challenges are all fully examined and explained.
Note to the editor:
In the tenth episode of The Business Coach that aired on SABC 3 on 2 September 2012, we saw just how important keeping the balance between costs and profits is to building a sound business.
In the following episode on 9 September 2012, viewers will see how a small business owner overcame various challenges and now needs to focus on growing his business.
Ruth Momberg | Senior Account Manager
Magna Carta Public Relations
www.magna-carta.co.za
However, turning passion into profits means understanding the art of effective costing, as noted by the Business Coach who has been advising small business owners on the Standard Bank-sponsored SABC 3 series about how to deal with the challenges that typically face South Africa’s small businesses.
Clive Pintusewitz, head of Small Enterprise and Enterprise Development at Standard Bank says that proper costing is the most crucial step in ensuring that a business is successful.
“If a business owner doesn’t know what an item costs and what it should be sold for, the chances are that the business will fail. Conversely, mastering this business art will literally pay dividends for years to come.”
Knowing exactly what it costs to open a business’ doors every day requires determining:
• What rent must be paid
• The cost of electricity
• Breakages or ‘shrinkage’
• Incidental running costs, such as packaging and wrapping
• What the business stocks and the cost paid per item
• The lifecycle of products on sale
• Wages and salaries
• Space planning
All this has to be balanced with the need to stay competitive.
“Rental costs will vary and are influenced by where premises are, the customer traffic attracted and the floor space occupied. It’s important to make sure that the business is correctly placed,” says Mr Pintusewitz.
“For example, if a business sells small, low-cost items, then obviously sales volumes need to be high. This means perhaps paying more ‘per square metre’, for the higher visibility and customer traffic that can be achieved in a major centre. To compromise and reduce costs, it is important that every square metre in the shop is used effectively.”
To be added to this “fixed cost” are others including the cost of electricity and additional levies, which could include the “marketing fee” that some major centres charge for offering in-house services such as advertising and event management. Some centres also demand that a business remain open for set hours. Close early, and the business could be liable for contractual penalties.
“Get clarity on all these costs before signing for premises. Finding out about them later could mean unplanned costs and extra expenditure on wages,” Mr Pintusewitz warns.
Remember that wrapping, paper bags, tissue paper and other packaging materials that may be free for the customer, have to be paid for by the owner. It is essential that the cost of these is understood and factored into operating costs, says Mr Pintusewtiz.
“As a business owner it is vital that the lifecycle of products is included. The owner of a hardware store does not have to worry about products ‘going off’, while the owner of cake shop does, along with the monetary loss that results. The possible effect of losses due to theft must also be considered.”
Many small business owners also fall into the trap of paying high wages, because they do not understand what is appropriate within certain business sectors. “Do the research, look at the business plan and targeted sales and then determine staff wages. See what others in similar business are paying and pay the average rate,” advises Mr Pintusewitz.
Once it is clearly understood what the business will cost to run on a monthly basis, profit margins can be set and monitored. Deriving this margin means taking total costs and then working out what return is appropriate.
“If, for instance, total costs are R 10 000 a month, the owner may consider a satisfactory performance to be R 14 000, which would mean a profit of R 4 000.00 or 40%. Therefore the mark up on products would be cost plus 40%.
“The art then lies in determining what primary products attract people to the store. It often pays to discount these and sell at a lower profit margin that is competitive. Slower-moving products that are more expensive can then be sold at a higher mark up. “
Business owners also need to understand that while costs may be high, merely pricing to make a profit may not be feasible, as competitor pricing also needs to be considered. Staying competitive is the key to success. If prices are in line with competitive businesses, or are slightly lower, there is no reason for a business not to succeed.
“It is crucial that costs, finances and cash flow are continually monitored. Review key financial information at least once a month. Take immediate action to maintain profits if costs increase due to outside factors, such as higher import costs,” says Mr Pintusewitz.
To learn more about all aspects of building a successful business, consider accessing “Coach Yourself” modules online at http://thebusinesscoach.standardbank.co.za, where business issues, problems and challenges are all fully examined and explained.
Note to the editor:
In the tenth episode of The Business Coach that aired on SABC 3 on 2 September 2012, we saw just how important keeping the balance between costs and profits is to building a sound business.
In the following episode on 9 September 2012, viewers will see how a small business owner overcame various challenges and now needs to focus on growing his business.
Ruth Momberg | Senior Account Manager
Magna Carta Public Relations
www.magna-carta.co.za
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