Cost Structure…
Is your efficiency
What is a cost structure?
You Get What You Focus On
For Example:
The cost of goods sold ratio is found by dividing the cost of good sold amount by the Income (Sales) this will give the percentage of cost of good compared to the income.
In the example above this is 60% which means for every dollar that comes in from sales 60 cents will go to the cost of good sold.
When this process is completed for every item over say the last 10 years, you have the tools to understand where the costs of operation will need attention.
Focussing your attention on the biggest ticket items , You have the opportunity to increase the net profit with some simple changes.
Ask! How was this number created?
Although this sounds simple and logical it can at time become challenging for in most cases the high ticket item are salaries.
This means you must now look at the job description and performance of every person employed, to see if they are contributing to the efficiency of the business.
Are they part of the team bringing money into the business or are they in the team managing the cash within the business.
These decisions need to be made with little or no emotion for the wrong decision based on an emotion can bring the company down.
Business is Small money in ..BIG money OUT
Know your cost structure and increase the efficiency of your business.
If you cannot do this yourself, have your accountant produce this report for you each month. Use the cost structure as your management tool for the big picture of the business, also the same principle can be used to understand the manufacture of a product or management of a performance contract.
Ask! How was this number created?
Colin Burr
Learn Accounting Fast
