small business risk management

The Full Cost of Small Business

It isn’t the cost of staff that cripples small business, it is that the full cost of staffing isn’t factored into the prices charged for products / services. This is true of other costs as well.

This is a very bold statement that I have found to hold for a lot of the businesses I have talked to and / or worked with.

It is not uncommon for small businesses to base their pricing on what others are charging for the same or similar items. Alternatively, prices are what the owner would pay or what they think their customers will pay. No facts, no figures, no research! When you consider this benchmark could be based on other businesses doing the exact same with their pricing, it is easy to see where things go astray and money flies out the door.  

At the beginning, start-ups absorb a tremendous amount of costs. Very few owners take an income commensurate to the hours, investment, and skills they put in, sometimes for years – if ever. 

However, as the business moves from start-up to being an ongoing business, the business should:

  1. not be treated as a paid hobby nor to buy the owner employment, unless this is intended;
  2. have sales completely cover the full costs of business;
  3. have a clear profit in accounting terms (including owner’s wages).

I can’t tell you how many times I have been told that the financial side of small business is just too hard and complex.  I personally find anything to do with finances terrifying but am now a complete convert.

If your customers aren’t willing to pay for the full cost of the goods or services then you have a loss leader business model. If you decide to absorb some of the loss you are subsidising your customers’ purchase/s.  Is this your intent?

Every single financially successful small business I have known that has survived for more than 10 years has taken the time to learn and understand the full costs of business.  Not only that, but from the very beginning, the owners have kept on top of it, knew their financial position, and taken appropriate action when required. They work out how much things truly cost to provide / deliver / manufacture and make sure they get a return on investment.  It’s not 100% foolproof but it goes a long way to setting the business up for success.

When I talked to the owner of a very successful business, she said ‘Business is easy, you just have to look after the basics.’; one of which is working out how much it costs to provide the goods or services and price accordingly.

Leanne Bicknell               +61 (0)455 330032

Something worth travelling for

Bajai Halfozo Fesztivál (Baja Fish Soup Festival), Bajai Hungary. One day a year the centre of town is filled with more than 2,000 non-professional teams cooking fish soup in huge cauldrons. Take along a bowl and they will fill it for free. Better still, buy a handmade, decorated fish bowl from one of the many stalls and go on a tasting spree. Enjoy the many activities available while you eat this traditional meal.

Resources for those interested and that have time

LinkedIn ‘How to Calculate the True Cost of Your Product or Service’ Yair Segev, NY Practice Lead, CFO Services at Escalon Services June 16, 2020

Cameo Financial ‘WHAT IS THE TRUE COST TO OWN A BUSINESS?’ Rkapur, November 7th, 2019  

Shopify ‘The Cost of Being the Boss: What Business Owners Spend in Their First Year’ Roxanne Voidonicolas, Starting Up, Jan 12, 2021

Australian Federal Government ‘Calculate the start-up costs of your business’ Last Updated: 14 July 2021