When you do business, obviously your goal is to earn from the revenues. But, a common mistake that many business owners commit is thinking that business is only about revenues and they often forget that even if you are into the industry of selling, still you have to spend and pay for what your business needs. Most do not recognize the fact that everything you sell is technically an investment as you need to put your money into it first before you earn later on.
Now, in order for you to know the importance of knowing the costs of what you are selling, you first have to understand how it works and what is its role in your business. In that case, you only have to remember three key terms; Material, Labor, and Operations.
Unless you are a reseller, you’ll know that your product will require complimentary materials and parts regardless if you will manufacture them or buy them from third parties. But, aside from that you also need some manpower and on top of all that, you will also be required to shoulder the cost of shipping the needed parts to your warehouse and assembling these parts. That would be followed by human resources from labor, to rent, to equipment, electricity to run the operations, employees to sell said products in your store, as well as sales and marketing and finance and all the other departments. See, selling is expensive right?
It’s either all of these will apply to you or only some would. So let’s elaborate each even more so you’ll further understand and see what information can be useful for your business.
Materials
Commonly, this cost would be for the parts used to build or assemble your products. It is different from all the raw materials and ingredients needed for the products to be complete or it can also be any and all items purchased for resale and/or to create the product itself. On the other hand, it can also be possible that your products won’t be built with parts but that doesn’t mean you won’t have to spend on them because you can also include here the cost of the containers, plastic, carton or cans used to transfer the products.
Labor
Labor is not only about manpower. For many big companies especially those who have plants, warehouses and etc, labor costs might also include the parts or machines required to create the product as well as all supplies required in the production. Keep in mind that you also have to pay for the shipping parts and equipment to the warehouse to create the product, including containers, freight, fuel surcharges, etc and of course the workforce (people) who put the products together, ship the parts, etc. But don’t forget to include the costs for warehousing, including rent, utilities, etc. because sometimes, these are the some of the most costly.
Operations
Lastly, in your operations, you have to pay for your office staff which refers to everyone who is directly involved in the product as well as for the use of software, hardware, office rent and other utilities which are also important. Know that your operations may adapt to changes which may incur more expenses in the future.
The importance of the costs of selling is to help you determine whether your hard work would be productive and beneficial in the end. Doing the computations would tell us whether our decisions give us worthy results and if we earn enough. It is a review to help us do something on things that we can still improve. Just remember to do it right and to do it fairly.