How do you decide if an investment is worth it? How much more sales do I have to generate to make a new hire worthwhile? Are my products priced right?
To sustain and to grow a business, we have to make sure we generate enough value. To generate value, there are costs. Measuring costs help us bill customers, invest in people, supplies, and other resources. We get to make decisions that optimize our business growth.
Not identifying your costs will not make costs go away. We spend on cafe drinks and snacks while we wait for your next meeting. We pay for fuel to get us from office A to client B. Someone will still have to pay for these. And if the business is not paying for it, it will be out of our pockets.
We generate revenue from sales when our buyers get goods and services from us. It is not the only source of funds, or revenues. But for this post, sales is the only source of revenue. Profits or net revenue after taxes would be the money left after deducting all costs and income tax.
Lets go over the costs to make sure that we have everything covered.
- Cost of Sales
- Overhead Costs
- Capital Expenses
- Income Tax
COSTS OF SALES
Cost of sales are the expenses we incur each time we sell a product or provide a service. If we were to sell cookies, the costs may include: flour, sugar, butter, vanilla extract, walnuts, chocolate chips,
hours it takes to prep, bake, pack the cookies, LPG or oven fuel, packaging, etcetera. These would be the cost of goods sold.
If our business service was washing a car: soap, water, time spent cleaning the car would be your cost of services sold.
Sales less the cost of sales is our gross revenue.
These are the expenses we incur regardless of whether we sell anything or not. We'll spend on manpower for administration, fulfillment, sales and marketing. Let's not forget benefits like bonuses and government contributions. We should also include personnel training.
Office supplies, posters, flyers, ad spend, coffee are also costs. We'll also have to pay for transportation, rent, electricity, water expenses under services
Subtracting overhead costs from gross revenue, we get net revenue or profits.
"Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment." - Investopedia
These deteriorate and will have to be replaced over time. In our example, capital expenses would include an oven, a mixer, measuring spoons and cups, baking trays, etc. For the car wash: we'll need bucket, drying rags, brush, hose, etc. Depreciation costs is money set aside to pay for these capital expense.
For one reason or another, most of us don't like taxes. Regardless, let's think of taxes as our involuntary investment on government services. Among other things, government services provide an environment conducive to business.
A percentage of our income goes to the government as income tax. Taxes on sole proprietors are like the taxes paid by individuals with a salary. It ranges from 0 to 35%. 30% of the corporate profit or 2% of sales whichever is higher goes to the government. Corporate taxes only go down to zero if you have zero sales.
What about VAT and similar sales taxes? Suffice to say this is not a cost on our businesses because we should be able to pass this on to the end user. The same goes for withholding tax. There is a lot more that can be said about these things. We'll work on a separate post about these. stay tuned.
These are typical expenses that we incur when we run our business. It is clear that to make money we invest. We spend on our cost of sales, our overhead costs, and capital expenses. Lets track our costs properly and invest in things that will sustain or grow our businesses.