Do you know exactly the cost of your product or service?
Recently I have seen businesses where the management have not have an exact handle of how much their service / product is costing to create and then deliver to the customer. They were only able to give me an estimate of what they thought the cost was.
This has set me thinking. I just took it as a given that business would know and then keep monitoring what it costs to deliver the product or service. So why do I see it important?
Only by knowing these numbers will the business be able to react to the market. For instance if for one of your product or service lines there becomes some significant market competition then how do you react?
Knowing the cost regularly allows management to look at whether there are any efficiency issues that could be addressed. One business had measured the cost over two years prior but had no idea whether there had been any change (positive or negative) in the business since.
Knowing the cost will also enable the management to determine whether you should alter the product or service mix. Some of the products or services may be cut out or only sold on a certain basis. Also closely aligned to this there may be issues if the order size is above or below a certain level. Another related issue is the costing could be affected by when,where how the product or service is delivered.
These are some of the reasons why which could be summarised by saying that to make better decisions you need better information.
Do not get trapped by the fact that the monthly management accounts show the business is profitable. One the businesses I mention above is just experiencing the situation where another competitor with a good quality product is 40% cheaper than they are. Now the pressure is on to determine how to react. The management accounts showed healthy profit which has lead to complancey. We need to drill down further to get the exact detail on the cost of your product or service.
If you would like more details on determining the exact cost of your product or service please contact me - steve (at) majorfocusgroup.com
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