Knowing Your Costs Make You Money

Welcome to today’s episode of I Hate Numbers. Knowing your costs makes you money, a statement of the obvious perhaps. The thing with statements of the obvious is we sometimes forget the business basics. In this episode of ‘I Hate Numbers’ I am going to take a real cool way to look at your costs and for you to get great insights into your business. I don’t mean whether they're naughty, or nice, but how they react according to what your business does.

Why you should know what your costs are

Having a great product, customer focus, working hard, marketing, are all important.  Knowing your costs helps you with a lot more, including:

• Calculating your profit, current and future
• What prices to charge
• Your break-even
• Putting together your budget
• Controlling what you spend
• Which customers lose you money

Cost Behaviour and Business Activity

Cost behaviour is all about how your costs react and change.  We need to factor in business activity to complete the picture.  Some of your costs stay the same, whatever your business does; some of costs change, based on what your business does.  Listen to find out more.

Conclusion

When you understand your costs more, you’ll inject oomph into your money making.  The power of this insight and knowledge is numbers gold

What Next

Grab a coffee, make yourself comfortable, sit back and listen.  Start looking at your costs and see if you can match make them to your business activity.

I love doing this podcast and sharing my love of Numbers with you.  Check out the link to subscribe and don’t miss an episode.  Help me spread that Number Love by sharing it this podcast and others with your network.

In This Episode

• Knowing your costs makes you money
• Why understanding your costs is a big deal
• Understanding what costs behaviour means
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make money

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business--Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. It's Mahmood here with another weekly episode of I Hate Numbers, the show that wants you to get better acquainted with your best business friend, that can be the one that doesn't lie you, tells you the truth, and is there by your side in times of calamity, in times of calm, and in times of prosperity, guiding you through those waters there.

Now, last week's show we talked about profit. Previous week’s shows we've talked about cash that keeps the wheels turning. We've talked about profit in terms of effects within, the difference between what you charge your clients, and what it's costing you. What I want to do this week is to get down a bit more down and dirty with your costs and have a closer look under the bonnet as to what we mean.

Now, you might be thinking, okay, cost, we know what they are. And fundamentally, you need as a business owner to actually understand your costs and know what your costs are. Why do we need to know this? Well, we need to know the cost in our business, not only to make money, but to know how much money, and by money

I'm talking about profit, we're making. When we want to see that situation about what's the magic number when we've just about covered everything, we haven't lost money, we haven't made any money, but we're breaking even. If we're doing planning, which uh, again, I would fundamentally recommend all of you out there to think about, when you look ahead to the future, you've got to understand something about your costs.

Costs are really important when you figure out how much you're going to charge your customers, how much you're going to price your goods for, how much you're going to price your services for. Costs know where we are losing money, so fundamentally, cost is a big deal, and therefore, getting to grips with those costs here is really critical.

If you don't know what's going on, you can't control, you can't make it better, and you can't make more money, you can't survive. So, it’s really important to get to understand what those costs are. Now, in this week's podcast episode, I’ll show you and talk to you about a unique and different way to understand your cost, and we're going to do a bit of what I call number matchmaking.

Now, matchmaking, you might be thinking this is meant to be the I Hate Numbers show, not a dating app service, and what I mean by matchmaking is thinking about your business, describing it - let's not even get involved with the numbers - describing your business in terms of what it does, its activity, and matchmaking it with a cost accordingly.

We're going to throw in a bit of language, bit of terminology here. So, when you are talking to other finance people, your eyes aren't going to glaze over, and you've got something to bring to that conversation as well. The first thing I want to talk to you guys about is about business activity. So, all of your, our businesses or your businesses out there, you can describe them by what they actually do.

And I'm going to introduce this idea of business activity and I'm going to throw in a few examples for you to consider. So, if you are in the business of making things, so you're a manufacturer, your business activity, one way of looking at it, could be the number of products that come off the production line. It could also be the number of products that customers are buying off you.

You can talk in terms of orders, you can talk in sales. If you happen to be a consultant, or a service business, and you are selling in your, your, what's the gap between your ears, your intellectual property, your knowledge, then your activity could be described in terms of how many days, how many days of your time does your client want?

If you are doing workshops, how many workshops are you likely to be booking? How many workshops are clients actually buying into? If you are a retailer, your activity there may be described in terms again, how many customers that you've got, what the level of sales are from your business. So, lots of different ways of describing business activity.

Again, if we left that arena and we talked in terms of activity for different industries, if we think about aviation companies, activity there could be described in terms of how many journeys they're undertaking, how many miles they're traveling, the distance they're going. If you effectively are a hospital, your activity there will be described in perhaps the number of procedures, number of operations, so lots of different ways to describe business activity.

What we are now going to do is to match it with a cost that perhaps link with that activity, and we're going to introduce a term and we call it cost behavior. Now, we're not referring to behavior, whether they're naughty, whether they're nice, but we're talking about the behavior in terms of how they react depending what the activity is that's going on.

Now, let's think about an example that all of us can relate to in our daily lives. And if you happen to be a driver, you're in a vehicle going somewhere, the activity of that vehicle, that car will be described in the number of journeys that it undertakes, or perhaps the distance that it travels, the number of miles or kilometers.

That's the behavior that's of that particular item. Now, let's take a step back and link the activity with the costs that are connected with that transportation. Now, if you're a car driver, typically you've got the cost of running that vehicle, which will be the tax that gets paid for that vehicle,

you've got the insurance that goes on that. Those two items, whether you drive the car a hundred miles, a thousand miles, or effectively, if you leave it parked on your drive outside, or on your business forecourt, those costs will not change. Over a period of time, those costs will not fluctuate. They won't change whether you drive it a distance or you leave it parked.

Now, most costs, let's introduce a bit of language here, a bit of finance vocabulary, are called fixed. Fixed costs are fundamentally fixed, they're constant. They do not change irrespective of the level of activity that you undertake. Now, if we think in our own businesses here, if you happen to have a premise, you happen to have a restaurant, you happen to have a shop, then whether any customers come in through the door, you still are going to have to think about the rent on that shop.

You're still going to have to think perhaps about any local business rates and taxes that might also be there as well. Now, let's go to the other extreme. We've got the idea of fixed costs, and remember, link it to the activity of the business. Zero activity, those costs stay the same. Some activity, those costs stay the same.

Now, the other extreme are costs that actually react, go up and down according to how much activity is being undertaken. Now, let's think about the car again. Now, if I'm driving my car, the costs that will change, that will go up and down according to the distance that I travel will be the fuel that goes into the tank.

If I drive it no distance, I don't have any fuel cost. If I drive it a distance, the cost of fuel goes up in line with that activity. Let's again think, let's revisit some of those businesses that we referred to earlier on. So, if you're a restauranteur and you've got no customers coming through the door, then you've got no food costs to worry about.

If you are a hospital and no procedures are being carried out, no operations, then the cost of medication, the cost of drugs, again, there won't be a cost associated with that procedure. If you’re an airline company and all your planes are grounded, they're not going anywhere, then there's no kerosene, no fuel that you have to worry about that goes into the tank, if you can call it that

on those big aircraft beasts there as well. If you are a consultant delivering workshops, going to a client, then if there's no workshops to be carried out, then there are no attached travel costs that you've got to concern yourself with. So, that's our two side by side, costs that are fixed, costs that are variable.

Again, lots of words that we can fry about in the finance arena. So, by fixed some people like this idea of commitment, committed to those costs. Some people when they talk about fixed costs, they also mean they're non-controllable. So in the short term, if business takes a bit of a panning, if business goes down a little bit, there's nothing you can do in the short term to influence and change those costs.

Conversely, when we talk about variable costs, those are ones that are more easily, or easier, I should say, within our control, within our remit, we can do something about them. Ultimately remember, let's get real here. In the long term, you can change any costs and we are typically talking about in a short-term time framework, you've got those costs and how they react.

Now, those are the two extremes. Now, we're not quite finished with our cost story because there are a couple of other items of cost that we can throw in. Now, typically, if you are engaging and your, uh, staff, you've got a staff team on the payroll, those costs are largely fixed, so whether customers are coming through the door, you still got those salary costs to concern yourself with.

If you have more business coming through the door, those costs, your salary costs will not change. Now, it gets to that point where business is really quite demanding. You've got lots of orders coming through, you've got lots of people who might want to use your services, and you don't have the capacity to carry on serving and providing services.

So, you may get to a tipping point that says, actually, I can't cope with my existing staff team. I need to bring in some extra capacity. And therefore, in that respect, those costs that are typically fixed, will suddenly jump up, and so you know, prices for the imagination of the finance people, they're called stepped fixed costs.

Typically, if you imagine you are renting out some space to store some goods, store some product, the rent on that facility will be fixed. If you have to expand on storage ability, your storage capacity, then those costs will jump up as you need to rent additional space, and they're called stepped fixed costs.

Now, we've pretty much nearly finished here and I want to share a couple of tips with you at the end of this podcast. If you've just come into this podcast here, obviously I'd love it if you could obviously shout it out, share it here. Now, in terms of, just to finish up, sometimes costs can be mixed. So, if you imagine your mobile phone bill, you may have a contract that says whether you make any calls whatsoever, you're still going to have to pay a standing charge.

And then, after that point, we are going to charge you for each call that you make. Your utility costs, your gas, your electricity, typically, again, that'll be a mixed, a blended cost. You'll have a standing charge. So, if you turn off all the power, didn't use that resource whatsoever, then you would still have to pay the standing charge.

What you then pay is for each kilowatt, or whatever your metric is of energy and utilities you are using up, and that will be called a mixed cost. Uh, finance people by the way, don't always speak English, and they might call that a semi-variable. I think look at it as a mixed cost. Why does it matter?

Well, if that cost is quite significant when you're planning, remember, the standing charges don't change, and what you can control and what you can predict is the amount of resource that you consume. Now, a couple of tips here for you. Go back, think about the story. How would you describe your business activity?

What's the language? What's the descriptors you would have? Think about your costs. Have a look around your business. Think about what you're spending money on. Which of those would you say are fixed? Which of those would you say are fluctuating and variable? In future podcasts, we're going to dive deeper and going to show you, once you get your heads around this here, about how we can use that for lots of wonderful things like planning, like budgeting, like pricing, figuring out how much money you've got.

But for now, folks, that's enough from me. Hope you like this podcast. If you like it, a virtual high five from me. Go on to iTunes, Spotify, our own website. Give it a thumbs up, give it a review. Spread the word. Faith in that. Have a great week. Speak to you next week. Take care. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.