What are your real costs? That is a question that an accountant asked his client during a financial review. The client’s answer, “I have no idea!” I have money in my checkbook, we have deposited more this year than last, we are making money.
Well, the accountant had a hard time accepting that answer! Further exploration with the accountant’s client did not reveal any better answers or financial insight. The accountant spent many hours explaining to his client how not knowing what your functional costs were in fact, costing him profit.
In business, in life, in general, it is always important to know what your costs are, what the margins are for the products that you sell and how you can increase the margins in order to make greater profitability. Not knowing your costs, guessing and not accurately tracking each cost is one of the fastest ways to go out of business.
A restaurant owner we met with the other day knew, to the percentage point, his cost of each menu item, his labor costs and his overhead costs. This was very impressive, because our consultant identified that his sales prices appeared to be lower than comparable products in other restaurants. The owner said that Yes, that was the case, a menu price adjustment was in order, or a portion size reduction could accomplish the same objective.
Our consultant suggested that a portion size reduction was probably a better choice because the clients of the restaurant had become accustomed to the prices. After thinking about that for a few minutes, the owner agreed. What the owner learned was that he could reduce the size of a fish dish by 2 ounces, maintain the same profit margin and still have a good sales volume.
Knowing all of your costs is vitally important in running any business. The businesses that we see that are really in trouble fail to have good grasp of all things financial. If you are a business owner and are struggling to keep your “head above water,” knowing the cost of goods, the cost of labor and the general and administrative costs is paramount to success.
It is cheaper to employ the services of a consultant or accountant to aid and assist in this endeavor. A consulting engagement that can help straighten out your pricing structure is money well spent. Yes, it costs money, however, in the end, you will be able to have a much better understanding of your profit profile and be able to make wise, informed, data based decisions.