Welcome to this week’s Premier Business Operations newsletter…

Hopefully everyone has recovered from their overdose of Thanksgiving-induced tryptophan by now and enjoyed a relaxing long weekend with family and friends.  In the last newsletter, we started a discussion of the 4Ps, more specifically product price.   Of course, before considering the price of a product or service, the small business owner must have an understanding of the cost of doing business: the costs of producing the products that he or she sells, but also all of the overhead costs of operating a business.  In this newsletter, we expand on this by revisiting my friend Annie and her maple syrup business. 

As you may recall, I left my friend Annie with a little homework assignment to attempt to itemize the cost of producing her products:  preserves, chutneys, salsas, maple syrup and gift baskets with those ingredients.  As a side note, I heard the maple syrup glazed turkey was spectacular for Thanksgiving causing my mind to wander as I think about it.  After a lot of procrastination, she put together a few hand written notes.  It was tough for Annie to estimate costs on a per item basis, but she did a good job for the bulk production.  This table represents the cost production for 2 gallons (256 oz.) of bottled maple syrup and assumes a labor rate of $10 per hour:

  • 100 gallons of sap (4 hours labor involved collection)….$40
  • 8 hours labor of boiling down to syrup…………………………$80
  • 8 oz. bottles……………………………………………………………….. $0.50 each
  • Labels for bottles…………………………………………………………$0.25 each
  • 2 hours labor bottling and labeling finished bottles………$20

Since Annie and her husband own the sugar maple trees and property, it’s difficult to place a value on the actual sap so as long as the trees continue to produce sufficient sap, we’ll assume the cost of the raw product is 0.  Of course, if Annie was to expand her maple syrup production she would need to locate an additional source of raw sap.

Using the numbers that Annie came-up with, it can be determined that the production costs of as single 8 oz. bottle of maple syrup is $5.13.  After we calculated these figures, she was surprised by the final total, especially since she has only been selling the bottles of maple syrup for between $5 and $7.  While Annie wasn’t exactly thrilled with this information, she now knew that she was probably not exactly getting rich with this endeavor and she really wanted this hobby to be something that was more than a hobby.  It’s also important to note that these costs are only the variable costs of her business. 

There are still the fixed costs to keep in mind; in Annie’s case this is currently limited to farmers markets entrance fees; state and federal taxes; not to mention the initial investment in production equipment (tubing, evaporation vats, etc.).  Whether Annie sells 0 or all 32 bottles of maple syrup, these costs are still to be paid.  

While Annie’s business is a relatively simple one, it represents an important lesson as a small business owner – understand the costs of your product and the true costs of doing business This is especially important if you are the owner-operator of your business.  Even if you’re not actively working for a client or producing products, more than likely you spend significant time on marketing, billing, free consultations with prospective clients, networking events, etc.  These are non-billable hours and need to be accounted for in your overhead expenses.

So this week’s message from Premier Business Operations is make sure that you understand the true costs of your product or service.  Without this basic knowledge, it’s impossible to know the best places to trim costs when necessary or as we’ll see in a future edition of this newsletter how to price your product or service to be competitive and still make a profit.  A good exercise for any readers that have a small business or are considering starting one is to list out some of the expenses, both fixed and variable that you will encounter.

To find out more about Premier Business Operations and how we can help you better understand these costs or help your business grow, please visit our website at www.premier-business-operations.com or contact us at information@premier-business-operations.com

Cheers until next week when we’ll continue our discussion of the 4Ps and their importance…

Advertisements