Hi Steemians,
Here's an overview of how to use ebbs and flows of product categories to budget on the fly and leave your personal feelings out of it. Some call calculating like this heartless and cold but it's easy to stick to and is an effective way to run your business.
Firstly, acknowledge a cost in dollar value for every part of your business. Don't shy away from this, embrace it.
To get things going lets do an example with a cost everyone is familiar with and can relate to. Let's look at the face wash you use each morning. To figure out this dollar value, try to assume the cost on your first guess. This limits the time you need to acknowledge the cost. A close guess is better than a lengthy estimate. For this analysis we've chosen an arbitrary product. You can also choose gas in a company car, or food purchased for a restaurant.
For example - choosing any arbitrary product
I paid $5 for my bottle of face wash. I know I bought a mid level product and that it lasts forever. With that information I know that the cost per use will be very low. I also know that there are products that cost just less per use and just above. I use visuals to keep my time down but some people will be better at add the straight numbers. Whichever you feel most comfortable using.
Here's a sketch of what I would see in my head.
The graph needs to include three main points, 0, the price of the product, and the half way point. Once you have those points you can guess where the cost per use would fall on your graph. Instinctively we know the cost is very low because we're using such a small amount each time and the bottle lasts forever. For this reason we choose how far above zero the cost is, that's what the red line indicates (a blip up from zero). Because our product is a mid line product, we can choose right in the middle of the blip.
This arrow gives use two options to move forward with our analysis. One option is we continue with visuals.. and the other option is to break this down into straight dollars and sense and add them up as we go.
For this post we're going to stick with visuals but if anyone wants me to do the dollars and sense break down comment and let me know :)
Before this analysis gets too dry I want to show you how you can use the information that we have collected so far.
- Notice when you are using too many low end products in one place
- Find costs to cut in unnecessary high end products
Here is an example of a Gas Station budget where too much is being spent on high end products for the bathroom while the slurpee station is being under spent on. We know we need to allocate the costs from the bathroom to the slurpee station because the revenue of the slurpee station exceeds the perceived revenue of a high end bathroom experience.
We can reallocate A. from the bathroom to the slurpee station.
Knowing this information allows you to choose where to save money and where to spend money to have the highest impact on your business. This also shows you how you can cut costs when you are overspending.
Moving back into our original analysis of looking at the cost per use of our face wash, you may now see that it is an incremental step past knowing whether it's a high end or a low end product. Using purely high end/low end we don't get a clear enough picture of the best place to spend our time and money in our business. Albeit it is still better than no analysis at all.
Let's look at this graph again
The arrow is pointing to the middle of the red blip to signify where the cost per use point of a mid line product would be. We can then assume any products that are of similar price point and we go through at a similar rate are equal to the same value that we assigned to the face wash. Again using a more visual approach, we can envision face wash and similar products in regards to our appropriate budget
the area of A = the area of B
Our face wash and similar products take up this surface area of our overall budget. I have shown it from zero which make the cost look minimal compared to the entire budget, and then I have shown it as exceeding our budget. When we are over budget it's sometimes hard to see why or how we got there. When we use incremental costs then it's easy to say no or change directions when we see ourselves coming up to the end of a budget. This is how you can make tough decisions fast- when they are based on data, not personal opinion.
We use low cost, simple examples here but the same basics are used for budgets of all sizes.