Break Even Analysis, Costing, Pricing Strategy and Revenue Expectations

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Concepts

• Cost Analysis
• Pricing Strategy
• Breakeven point = fixed costs/ (unit selling price – variable costs)
• Pricing Terminology - Cost Price/ Trade Price/ Wholesale Price/ Retail Price

RESOURCES

Articles

• Overview on Project Costing - http://www.cs.odu.edu/~cs410/costing.htm
• Are you Charging Enough? 7 Easy Steps to Calculate How Much Your Product Will Cost - http://www.thedesigntrust.co.uk/calculate-how-much-your-product-will-cost/
• 15 Different Ways to Price your Creative Products or Design Services - http://www.thedesigntrust.co.uk/how-to-price-your-work-about-different-price-strategies-that-you-can-use/
• Project Costing in 5 Easy Steps - http://www.liquidplanner.com/blog/project-costing-in-5-easy-steps/
• Pricing and Costing for Small Business - http://www.pfga.org.au/content/Pricing___Costing_for_Small_Business.pdf
• Costing and Pricing - http://www.shell-livewire.org/home/business-library/accounts-and-finance/financial-forecasting-and-planning/costing-and-pricing/
• How to Estimate Project Costs - http://www.dummies.com/how-to/content/how-to-estimate-project-costs.html
• 8 Best Practices for Making Your Project Costing Easy by Replicon - http://www.replicon.com/white-paper/8-best-practices-making-your-project-costing-easy - Value Propositions From a Service Provider

OUTLINES

PROJECT COSTING

Based on http://www.dummies.com/how-to/content/how-to-estimate-project-costs.html

• Why is Costing Important
  • Weigh anticipated benefits against costs to see if project makes sense
  • Sees if funds are available to support project
  • Guideline to ensure you have sufficient funds to support project
• Project Budget
  • Direct Costs
    • Labour: Salaries for team members
    • Materials: Specific materials, supplies and equipment for project
    • Transport: Travel to perform work
    • Subcontracts: Subcontracts that provide support to your project
  • Indirect Costs
    • Overhead costs:
      • Employee benefits
      • office space rent
      • Equipment and Supplies: general supplies, costs of furniture, fixtures and equipment
    • General administrative costs: salaries of Management, admin departments, finance accounting etc.

Tracking Project Costs Best Practices

Based on http://www.replicon.com/white-paper/8-best-practices-making-your-project-costing-easy

• Move From Manual time tracking to cloud-based time tracking system: Replace paper and excel tracking with specialised solution
• Switch to Cloud-based solution for lower TCO and Less Hassle: Use Software as a Service (SaaS)
• Get Employees involved in Assessment process for every system you are considering: Choose Software that is easy for employees to Use
• Give Prospective system a thorough test drive: Get software that makes administration and reporting easy. e.g. comprehensive set of functions like flexible, easy to run, real-time reports, expansion capability, easy to set up
• Get Project Time Tracking System with accurate and timely cost information : Software should have real-time graphical views.
• Choose solutions with complete data integration: So that data is captured once and can be easily shared with other applications. e.g. project costing, expense reimbursement, payroll, and other processes. use open APIs and cloud based software
• Ensure Vendors can document their means to supply security, protection, disaster recovery and SSAE 16 compliance.
• Choose solutions with built-in means to accommodate regulatory compliance to your organisation: Automate compliance with regulations

Overview

Based on http://www.cs.odu.edu/~cs410/costing.htm

COST ANALYSIS

7 Steps From http://www.thedesigntrust.co.uk/calculate-how-much-your-product-will-cost/

• PART 1
  • Calculate Hourly Overhead Costs
    • Identify Annual Business Overheads (Doesn't include salary or raw materials)
      • From Monthly or quarterly invoices: Rent, Phone, Mobile, Insurance, Utilities, Marketing, Storage, Business Rates
    • Identify Number of Hours you actually spend on your work (Doesn't Include admin time)
  • Calculate Hourly Wage Requirement
    • How much do you want to earn?
  • Calculate Total Hourly Rate
    • = Hourly overhead costs + Hourly Wage Requirement
• PART 2
  • Calculate manpower cost to produce one Unit of product
    • Use a Time sheet and time log (Don't guess!)
    • Include all production process
  • Calculate total Material Costs
  • Add Contingency
    • To deal with changes, fluctuations and variance of costs
    • Can be a percentage of total cost (e.g. 10%)
  • Calculate Total Cost Price for each Product
    • = (Manpower Cost + Material Cost) X Contingency

Components of Cost

• Intellectual Property for use of registered ideas/products etc
• Material Cost
• Transportation
• Overheads: Rent, Phone, Internet, Utilities, Marketing, Wages
• Storage Costs
• Means of Transaction: Cash, Credit, Effort to process transactions
• Taxes, duties
• Commissions
• Invisible Expenses

PRICING STRATEGY

Different Pricing Strategies - http://www.thedesigntrust.co.uk/how-to-price-your-work-about-different-price-strategies-that-you-can-use/

• The Cost Price
• The Going Rate
• Value-Based Pricing: How much financial value does your work influence your client. You can include it into the final price.
• Bundle Price
• Credibility-Building Price: In exchange for lower price, you obtain other returns like credibility
• Premium or Prestige Price: The client pays for your exclusivity, brand and position in the market. Usually you will need excellent customer service throughout entire selling process, work with best materials and be different from everyone else.
• Extra Features Price
• Psychological Price: Using regular numbers or psychological numbers and terminology.
• Discounted Price
• Loss Leader Price: Pricing below cost (incurring loss) to attract clients in the long run.
• Emergency Price: To include additional price of services if you foresee customer giving future problems
• International Price
• Fixed Project Budget: Divide project according to different stages: i.e. 30% Deposit, 50% Creative, 20% Delivery
• Retainer: To ensure reliability and consistency of service
• Client Expectation: Negotiate and make counter offers

BREAK EVEN

Break Even (Economics) From Wikipedia

http://en.wikipedia.org/wiki/Break-even_(economics)

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How to Do a Break Even Analysis

http://entrepreneurs.about.com/od/businessplan/a/breakeven.htm

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Break Even Analysis

http://articles.bplans.com/break-even-analysis/

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Break Even Analysis and Forecasting

http://home.ubalt.edu/ntsbarsh/business-stat/otherapplets/breakeven.htm

http://www.tutor2u.net/business/production/break_even.htm

http://www.inc.com/guides/2010/12/how-to-perform-a-break-even-analysis.html

http://www.investopedia.com/terms/b/breakevenanalysis.asp

Tools

• Break Even Calculator http://www.bplans.com/business_calculators/break_even_calculator/
• http://www.dinkytown.net/java/BreakEven.html