Many entrepreneurs want to understand their cost price. In practice, however, this is often put off because costing quickly seems complicated. There are elaborate models where costs are divided between products, services and departments. While these methods can be accurate, they are not always necessary to gain initial insight.
With a series of short articles, we will show you how entrepreneurs can get a better grip on their cost price step by step. Instead of starting with complex models, we start with a practical basis: calculating costs back to workable days. From there, the calculation can be further refined.
At VWG, we can support entrepreneurs in understanding their cost price and translating it into practical management information. This can range from setting up an initial simple calculation to further developing cost prices per hour, per employee or per product/service. The aim is always the same: to gain better insight into what a company should earn as a minimum and whether rates and prices match.
In this first article, we start with a simple but effective step: calculating the cost per workable day.
Total cost
The first step is to determine the total costs of the business on an annual basis. Adding up these costs gives an overview of what the company needs to earn annually as a minimum to cover all costs. For this, initially include staff costs and all other operating costs (including depreciation).
Workable days
It then looks at the number of days that can actually be worked. A year has 365 days, but much of that is not productively employable.
Practical considerations include:
- weekends
- holidays
- holidays
At many companies, this leaves about 220 to 230 workable days per year about.
Cost per working day
Dividing the total annual cost by the number of workable days produces a simple but valuable key figure: the cost per workable day.
This figure provides immediate insight into questions such as:
- what a working day should yield as a minimum to cover costs
- how much margin per employee is needed
- Whether the current rates are sufficient
Short calculation example
Assume that the total cost of a company €220,000 per year amounts. When assuming 220 workable days, this means that, per working day, the company will have a minimum of about € 1.000 must earn to cover costs.
If four employees would be productive for an average of 7.5 hours a day, this equates to a cost of about €33 per hour.
This kind of simple calculation gives quick insight into whether rates and prices match actual costs.
Practical starting point
Calculating cost per working day is not a full costing, but it is a practical and quick starting point. From this basic understanding, further refinement can always be made later, for instance by converting cost price back to hourly rate or calculating productive hours. In the next articles in this series, we will elaborate on this.