One of the most common problems (often faced by those producing a product), is due to incorrect costing. Many businesses underestimate their overheads or do not take into account problems that may occur and their costs eg .a car engine ‘blowing up’ and having to be replaced.
A rule of thumb that can help keep you out of trouble is the following:
Work out your PRIME COSTS (Labour and Raw Materials) then add 40% for OVERHEADS. You now have the COST of your product.
You should not reduce this cost in any way. If the cost is unacceptable to your client base, then don’t produce the product. It does not make sense to be selling a product for cost or less than cost. You then add the PROFIT margin. This is the area that can be manipulated and varied.
Many operators in the service industry make the mistake of not including a profit margin to the costs of their service. They earn a wage (and often a good wage) BUT if they want a holiday, or get sick, or get so busy they need to employ – they can’t, because they have no profit margin built into their costs. Operators should receive a profit, regardless of who is providing the labour.