I had an interesting meeting with a start-up the other day. The client had a terrific, highly-marketable product they had conceptualised and produced themselves… with no prior business experience or outside advice, they had managed to secure legal protection for the item and taken a simple idea to an impressive physical product.
When speaking with the client at first, it seemed like they were on the right track. First of all, they had attempted an actual PLAN and commit it to paper. You’d think that was obvious, but most of the DIY business plans I usually see rarely amount to more than “my plan is to sell lots and make heaps of money”. We discussed this along with a marketing strategy (both of which were realistic given the financial commitment and time the client was able to invest).
The plan was lacking in financial information, however this aspiring entrepreneur already had clearly defined prices for the trade and the public in mind. In fact, they had already secured several wholesale orders at these prices. So, naturally, I asked the most fundamental of questions: “what does it cost you to manufacture?”. To my shock and horror…. THEY HAD NO IDEA!!!
You MUST know and UNDERSTAND your costs!
In fact, while plenty of thought had been given to potential sales, no thought whatsoever had gone into what really matters – PROFIT!
Any business that sells products needs to know its product costs. At the very least, you should know the direct manufacturing costs (maybe your accountant will need to help with applying indirect costs). The total cost of goods or products sold is the first and usually largest expense deducted from sales revenue in measuring profit.
As it turned out, after we were able to determine the actual cost to produce each unit, the client discovered they had already commit themselves to supply orders below their cost. Thankfully, they sought assistance before the damage was too great or it would have been a very short-lived business venture.
Article by Christie Lewis
Christie is Practice Manager at Alan Lewis Accountants . Besides accounting, her passion is for all things small business (and blogging, of course). You can contact Christie directly at christie@lewistaxation.com.au.
Christie has written 799 awesome articles for us at Alan Lewis Accountants – BLOG
Twitter: @christielewis
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