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Understanding The 2 MOST Important Costs For Your Business To Make A Profit
There are certain costs that many people tend to forget throughout the month that can affects their profits and cash flow. Sometimes, even one missed cost can make or break your business. Not understanding how to calculate your total business costs can cause your business to fail. This article is going to break down the two types of costs (fixed costs and variable costs) you MUST know for your business to make a profit!
The two main costs that a business owner needs to understand are;
- Fixed Costs
- Variable Costs
It is critical to understand how these costs affect your profitability as a business.
These costs help you find out one important metric: the Breakeven point, or BEP.
Your BEP is the point at which your business is not losing money and is able to start making a profit.
Before you can figure out your BEP, it is important to understand the difference between the two types of costs and how to put them together for an overall total of your business expenses.
What is a Variable Cost?
The variable cost is a good or service the changes each period. In other words, it is any cost that is NOT the same every month or year.
This cost can go up or down depending on your sales and the cost of goods.
Examples of Variable Costs include:
- materials used to make your product(s)
- shipping supplies
- postage costs
- Amazon/ e-commerce fees
- credit card processing fees, etc.
- Pretty much any cost that will change depending on how many units you sell of your product or service will cound as a variable cost.
What is a Fixed Cost?
The Fixed Cost is much more simple to figure out. Fixed costs are expenses that stay the same no matter how much you revenue you make.
This is a cost that usually occurs on a periodic period and is the same from one charge to the next.
Some fixed costs are monthly, and some might be yearly, such as yearly subscriptions or renewal fees. And some might be even farther spread out, such as a trademark renewal or website domain.
These are costs that you know will come every month (or whatever period they are billed) and that you still have to pay, even if your business does not make any money.
While it is easier to understand (and find) fixed costs, this is OFTEN where businesses make mistakes with calculating their costs.
This is because people tend to overlook or forget about certain costs, and that can affect your bottom line and cost you unexpected money.
Common FORGOTTEN fixed costs include:
- Web hosting (Bluehost, Hostgator, Siteground, etc.)
- Monthly services (Google, email, Canva, Medium.com fees, analytic services, etc)
- Storage fees for monthly cloud storage/data
- Cost of internet & business phone/cell
- Business registration fees, trademark renewal fees
- Cost of domain registration/renewal
- Business insurance (depending on your business)
- Office space rent (even if you have a home office!)
- Gas for business related errands
- (You can even get super nitty-gritty like expenses for your laptop, smartphone, biz wardrobe, etc…)
Even a couple of these costs can add up to HUNDREDS of dollars per month, making a big difference in your bottom line.
It is SO IMPORTANT to figure out your business costs!
Again, we can not stress enough why you NEED to know these costs!
Understanding your accurate business costs will help you determine if you are making money or if you are accidentally just flushing it down the drain.
(If you do not know how to figure out your actual costs, reach out to us and we can help you!)
To start figuring out these costs, you should sit down, look at your bank statements, and write down each and EVERY cost that occurs.
Make sure you get every little thing, going back for at least one year, and don’t forget the fees and charges that might occur every two-three-four years.
Even those pesky little app fees can add up quickly each month.
Once you know your total costs, you can figure out your BEP- break-even point and make sure you’re not losing money.
We will have another article to explain your BEP more clearly and help you get a CLEAR idea of how much money you need to make to have a set profit- so bookmark this website!
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