Using a unit-cost strategy can help you get a handle on your marketing budget
As mentioned in my last blog, it’s critical that companies decide upfront how much to spend on marketing in a given year. That’s tough for start-ups to do. But it’s a bit easier for established companies that use a unit-cost model.
First, take a standard profit-and-loss statement and break it down into values per unit. Each transaction equates to one unit. Then project the number of units you will sell in the coming year. In this example, let’s call that number 100.
Next, determine the transaction value. That’s the unit selling price. For this example, let’s say it is $1,000, and those 100 units multiplied by $1,000 is $100,000. At this point, we’ve established the two most critical considerations: the number of transactions you are likely to have, and their unit selling price.
Now, let’s turn to the calculation of unit costs. The first thing we will examine is the direct costs associated with those sales. That is the cost of goods sold, the cost of the order process and fulfillment. This cost will include everything but overhead and marketing.
When you add up those costs, applying them to the units that will be sold, you have unit costs for the direct costs associated with the sale. Let’s call this $500.
Next, let’s examine overhead-per-unit costs, including rent, electricity, other utilities, office expenses, telecommunications and salaries. Let’s call this $100.
Adding direct per-unit costs and overhead per-unit costs, we will add $500 and $100, for a total of $600. What’s left to us is $400 per unit.
Now, we want to set a profit objective. Let’s say that’s going to be a combination of 20 percent of sales, less direct costs, less overhead. Taking a 20 percent slice of that $400 above, we come out with a profit of $80 per unit.
Now we’re ready to calculate the allowable marketing costs. We’re going to subtract direct cost, overhead cost and profit per unit, which comes out to $680 per unit ($500 + $100 + $80) from average selling price, leaving $320 per unit.
Based on the projected unit sales of 100, times the $320 per unit marketing costs, leaves us an allowable marketing spend of $32,000. That’s how much you can spend on marketing in the coming year.
In this simple exercise, we’ve established how many units you’re going to sell, what the selling price will be, and what the costs of making that sale will be, and your profit objective, leaving the remainder available to spend on marketing.
Knowing your allowable marketing spend answers a very critical question. Many people struggle with how much money they should spend on marketing. But you don‘t ‘t have to face a similar struggle. The key is to establish how much profit you want, before you start spending your marketing money wildly.
If you need insight on your marketing spend, please contact me. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business.
My phone number is 630-269-7646.
Misclassified expenses and un-segregated revenue streams result in poor financial reports that can halt a company’s progress in its tracks
It’s hard to make informed decisions about a company’s future based on poorly- structured financial reports. Yet many small to mid-sized companies rely on reports beset with serious problems. No wonder these firms aren’t growing.
One common problem with financial reports is that the reporting system is capturing a variety of product or service revenue streams in one account. Without those streams being segregated, the CEO doesn’t know what areas of the business are doing the best and worst jobs of generating critical revenues.
Another all-too-frequent issue is misclassification of expense categories into overhead, rather than cost of goods sold. As a result, companies get a read on gross profit and gross margin that is simply not accurate.
For example, if a company wants to launch a new marketing program, officers will attempt to determine how many additional sales the program will have to generate to justify its cost. If they don’t have an accurate read on gross margin, they will make a decision based on skewed sales numbers. That could result in the marketing program being over or under-funded.
These financial reporting issues are very prevalent, and are present in four out of every five companies I counsel. The problems exist for two reasons.
First, company officials don’t know how to distinguish between direct costs to produce sales and those line items that should go into the category called “overhead.” Second, despite their desire to place all transactions in the right categories, the companies do a poor job of coding, or classifying, transactions.
Unless the company addresses these reporting issues, the CEO will face the same problems month in and month out.
He or she must take a stance and rectify the reporting problems. If the CEO is smart, he’s going to say, “We have a direct cost of generating these sales dollars in overhead. They should be in cost of goods sold.”
The result of poor financial reporting is wasted time. The company wastes time pulling financial statements together, and again wastes time being forced to pull information out of the accounting system into a format that can be used. Precious hours and days that could be used to concentrate on building profitable sales growth go down the drain. In this case, wasted time truly is wasted money.
In the preceding paragraphs, I’ve discussed the surprising prevalence of poor financial reporting, and the negative outcomes that result. In my next blog, I will address steps chief executive officers can take to meet the problem head on.
When is it time to step away from your business? Have you achieved all the goals you had in mind? Are you able to retire and pass the torch onto a trusted advisor? These are questions you may want to consider early on in your entrepreneurial career.
When business owners have less than a year to prepare for the sale or transition of their company, some decisions may be made hastily. By looking ahead, you can position your businesses correctly, find the best person to take over and train them appropriately. Whether you need to bring in a salesperson to attract new clientele, jump into a new market niche, cut down on your overhead or acquire another company, it is best to begin your initiatives now.
A corporation can survive without the original owner or founder if there are processes and details outlined in advance. This month, I will feature the questions you should ask yourself when putting together a succession plan.
Week 1 – How Much Are You Worth?
Owners pour their heart, soul, and all their resources into growing their business. This means that their company is going to be their biggest retirement asset.
The value of your business extends above and beyond your sales revenue. Many owners start their companies from scratch and work for decades to establish a successful operation. As a result, they need to do everything they can to protect the value of their brand and take care of their long-term relationships with their customers and clients.
The total value of your company is comprised of:
- Your company’s reputation
- Your employees’ capabilities and qualifications, and past performance
- Your advantages over competitors in key regions
- The profit contribution of your major clients to the firm
Planning is paramount for long-term financial security. At what age do you plan to transition your business to someone else?
The largest expenses for a business are (in no particular order) labor, variable overhead and marketing. We need employees to keep our companies performing and we need marketing to stay relevant in a changing marketplace, but do we need to continue paying exorbitant overhead expenses? Some expenses can’t be helped (such as rent, equipment rentals and utilities), but there are ways to manage the amount your business pays as overhead.
Week 3 – Reduce Variable Overhead
Is your office located in an area that makes sense? Do you need to maintain a downtown address or is it ok to have a smaller office close to home? Is an office space even needed? Determine whether or not you could save by working at home or if you need an office to frequently meet with clients face-to-face.
Ideally, you should also be able to collect all of what you produce within a month. For example, if you sell $30,000 worth of products or services in October, by the end of the month, your earnings should be $30,000. Why is this important? If your overhead averages $15,000 and you only collect $10,000 at the end of the month, you are now facing a deficit.
Did you know that you could preserve the environment while saving money when you move to a paperless and cordless environment? Printing costs in an average office (when you factor ink and toner, paper, envelopes, etc.) may be shocking when it is all added up. Cut the expensive paper trail by storing files and receipts on your computer instead of multiple file cabinets. Many businesses are able to rely on interactive voice communication options to stay in contact with their clients. Solutions such as Google Voice and Skype can be connected to a cell phone or computer and used free of charge.
Here are some additional suggestions to help reduce overhead and other expenses in your company:
- Set a monthly limit on corporate accounts for entertaining clients
- Switch banks if you are paying monthly maintenance fees on your accounts
- Seek out interns for the summer to decrease labor costs
- Renegotiate vendor contracts by asking for better pricing
- Sublease some of your office space or move to a smaller location
What measures will you take to reduce overhead costs in 2012?