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Your Total Guide To Business
There is a world of difference between a service-based business and a manufacturing business, when it comes to how to approach pricing. And, it goes without saying, it’s essential to get the approach right.
Here’s one example. We work with the owner of a service-based business, whose charges are based on selling time – in other words, number of hours worked charged at an hourly rate. The rate here is important, as it needs to cover the direct cost of working that hour but also an element to cover overheads and tax, and to provide a profit.
However, our client then set up a manufacturing business and soon found pricing was a very different concept. He was buying raw materials by weight and selling on his final product by volume. Unlike selling time, money is needed upfront to buy in supplies and any slight variation in the unit cost for those raw materials makes a big difference to profits.
We carried out an analysis of the business, converting the costs per the accounts to get a per unit average cost price of the finished product. This revealed our client was overspending by £6 per unit – that equated to a significant £21,000 in lost profits, every quarter. This overspend accounted for only a very small percentage of total turnover and was quite easily overlooked.
Armed with this knowledge, we met in person with the client to identify the reasons why this had occurred. One was because the process involved more wastage than had been anticipated; another was the delivery of raw materials being 10 per cent underweight each time.
Changing suppliers and increasing the quality of the raw materials purchased resulted in more accurate deliveries and less wastage produced.
At Optimum, we take the ‘tech’ side of the numbers and convert them into information business owners and directors understand. This provides more confidence in the numbers and their decisions as they actually know what their accounts are showing them. We work with manufacturers as well as service providers and our goal is always to help our clients improve their businesses.
If you would like some help or advice on business planning and understanding your numbers, please get in touch with Michael Blaken, Accounts Director at Optimum Professional Services. Email[email protected] "> or call 01793 538 198.
Optimum is a ground-breaking firm in Swindon, combining accountancy and legal services under one roof, providing a seamless service for their clients.
Vicarage Court, 160 Ermin Street, Stratton, Swindon, SN3 4NE
Website Email 01793 538 198
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