By Alec Pendleton, Big Ideas for Small Companies
How much does it cost to operate your business for a day?
I have two companies, a manufacturer and a wholesaler. It costs $34,000 each day to operate the manufacturing company, and $3,200 to operate the wholesaler.
Why is that important?
It serves as an instant indicator of profitability, and gives me the earliest possible warning of developing problems.
The numbers are calculated very simply. They are the total annual cost of EVERYTHING BUT THE MATERIALS WE USE, divided by the number of days the business operates in a year. They are what we spend on wages and benefits for all our people, plus rent, and utilities, and advertising, and real estate taxes, and everything else – our total costs of operating the business each day. Our cost of adding value.
By comparing these numbers to the actual value-added we sell, I can know right away whether or not we made money. The value-added we sell is simply our sales dollars, excluding the cost of the material used in the products we sold.
So, for example, in the case of the wholesaler, I subtract from our sales dollars the cost of what we sold – the money paid to our sources – and what I’m left with is the value we add as a distributor.
The difference between that value and the cost of generating that value is profit.
These numbers give me important information on two fronts. First, by tracking the Value Added Sold over time, I can understand quickly whether the business is growing or shrinking, and second, by tracking the Daily Operating Cost over time, I can make sure the expenses are under control.
I calculate these numbers monthly – it takes only a minute or two – but I use rolling-last-twelve-months figures to eliminate the minor volatility of monthly measurements. Any one month might include all manner of unusual items, but looking at a full year will always even those out.
So, for example, at the end of each December, I look at the numbers for that calendar year. Then, at the end of January, I drop the year-ago January and add the current year, so I’m looking at figures for the year from February 1st through January 31st. Then, at the end of February, I drop last year’s February and add this year’s. And so forth.
Accounting information can be confusing and intimidating, but a few simple measurements can provide a quick, easy, and useful tool for helping you run your business.
© The MPI Group 2016
