Sponsorship deals are reasonably common in business. A business pays an agreed amount to an individual, a team or a group, and in return receives media coverage, brand awareness, maybe some tickets and merchandise and of course the satisfaction of making a difference.
Sometimes it is not just cash that a business gives a sponsor, it is discounted products. Sponsorship deals are negotiated, are real and serve a purpose. However, there is a different type of sponsorship – when a business owner inadvertently “sponsors a client” without intending to.
In normal circumstances a business owner is motivated to make their business as successful (and profitable) as possible. If a business is to make a profit, it needs to sell goods and/or services by applying a mark-up. If you don’t get the mark-up right, then it is highly likely you are sponsoring your clients. What do I mean? By not knowing what your true costs are, or by incorrectly applying mark-up, your clients may be underpaying you and you are taking the hit.
If you are in a retail business, it is relatively easy to apply mark-up, calculate gross profit and take into account your overheads, but let’s consider a business that manufactures a variety of products requiring different combinations of inputs (for instance, materials and labour).
If you don’t understand your true cost of the inputs, you may be offering some products at a loss due to:
- Additional labour costs depending on complexity.
- The cost of your raw materials increasing or creeping over time.
- Overheads increasing over time but the allocation of overheads not being updated.
- An error within the inventory management software.
- Not applying freight, customs and duty costs correctly.
If you are in a business that provides a service or produces a product, you really need a job costing system, so you know what the gross profit is on each job. When you quote for work you won’t always get it right (small swings and roundabouts are okay) but if you are making a loss on more than a few jobs, then you’ve got a problem.
- Do you increase your prices to reflect your true cost?
- Do you try and reduce the cost of your supplies?
- Can you improve efficiency by reducing the time on jobs, reducing direct wages cost?
- Do you drop some unprofitable lines or services?
A job costing system doesn’t need to be complicated; it just needs to be fit for purpose. If you are a small business, you can run a fairly simple system. Once up and running, you will wonder how you ever managed before!
Technology, also, can let you down – a simple error in your costing system or software can have a catastrophic effect on your profit. The more electronic businesses become, the less visibility there is around back end information. It is easy for a staff member to incorrectly enter stock into the system or for a stock system to incorrectly allocate cost prices based on units – individual items v packets v boxes v pallets.
Let’s look at a simple example:
You purchase 1 box of 10 widgets at a cost of $10 each [cost = $100]. The box of stock is entered into the system as a 1 box @ $10 [with 10 units within]. A cost price of $1.00 is allocated to each widget in the system instead of $10. Consider this scenario across 2000 stock items!
Implement checks and balances as part of your ongoing controls so you have confidence in the back end of your systems. Remember rubbish in equals rubbish out. It is a common mistake to overlook this area of business management and focus on meeting customer demand, but it is an easy way to improve your profitability.