Agserv’s Tips for Getting Your Company Costing Right
Costing and pricing for your pest control company is one of the most important practices you need to master. Ensuring your costing and pricing is on the right track allows you to break even sooner and start turning out a more profitable business.
Knowing the Types of Costs
Making a list of all your costs is generally the first step in any costing process. Your costs should be divided into 2 different categories:
· Fixed Costs: Fixed costs remain the same, even when production increases or decreases.You have to pay your fix costs regardless of how much revenue you earn (Examples: wages, accounting, rent, insurance, licences etc.)
· Variable Costs:Variable costs change depending on your production/operations. The more you sell or expand, the more your variable costs will go up (Examples: raw materials, chemicals, advertising, training etc.)
Size of Each Cost
When assessing your costing, one of the most important things to keep in mind is the size of each cost. Size is the proportion of each cost vs. total sales.It is calculated in percentages.
Let’s say your sales come in at $200k and you pay a total of $52k in wages:
· Sales = $200,000
· Cost Item (e.g. wages) = $52,000
· Size of This Cost = 26%
Once you know this for all of your items, you’ll be able to see how much of your total costs are fixed (e.g. 72%) and how much are variable (e.g. 28%).
Breaking Even & Making Profit
Breaking even happens when your sales fully absorb your costs. Once this happens, you can start to make a profit.
In order to understand how quickly you can break even/make profit, you need to work out your Variable Cost Per Item (or Variable Unit Cost). This is important because the more you sell, the more your variable costs will also increase.
· Variable Cost Per Item is your Total Variable Costs divided by the Total Sales in your report
· E.g. Variable Costs $12,000 ÷Total Sales $132,000 = $91.00 (Variable Cost Per Item).
Once you understand your Variable Cost Per Item, you can calculate how many items (or jobs) you need to sell and how quickly in order to break even and/or reach your profit target.
Agserv Tip: If your fixed costs are low, you will be able to break even sooner and therefore move into being profitable sooner, since you’ll have less fixed costs to absorb; your variable costs vs. how much you sell will then determine exactly when you can start making a profit.
The Hard Costing Lesson
The important thing to remember is that costing/pricing is about understanding how much money you need to keep your business going.There are 2 critical lessons to understand here:
û Avoid pricing your items to where the market is.While understanding market standards will help you remain competitive, pricing to the market means that you’re not costing/pricing based on your business needs. Instead, you’ll be pricing based on figures that aren’t relevant and that won’t necessarily be enough to keep your business going.
ü Instead, price to where you will actually make money.How much will it cost you to get out of bed every morning? How can you adjust your pricing to break even faster and make profit sooner? These questions are vital when it comes to costing, because it means that you set your prices according to what your company needs to thrive and grow.
Have you got a costing or pricing question? Or keen to share your costing know-how? Contact Eris Hess at Agserv on: 02 96472111