Top Tips for Small Businesses: overhead recovery

overhead recovery

Are you getting your overhead recovery right? This could be the difference between your business making a profit or a loss.It is common for a new business to “test the water” with product pricing.  They use the “going rate”.  Who would want to buy from them if they could get it cheaper elsewhere?

A business will incur direct costs and overheads.

Direct costs vary with the level of product sold (such as raw material costs, labour costs, etc.).

Overheads are fixed and do not depend on what is being sold. Examples are premises rent, admin salaries, accountancy and professional fees, depreciation, finance costs etc..  Often a new business will set its prices taking into account the direct costs alone.  Overheads should be recovered by estimating sales volumes and pro rating the overheads accordingly. Do not forget to factor tax into your calculations.

Once the true cost if the product is known the mark up can be set.

Are you covering all overheads?

A new business owner may not pay themselves in a bid to get the business going and build up a reputation and a customer base.  When setting product pricing they should decide what remuneration they would want to take from the company and adjust their prices accordingly.  If operating from a home base, will you need to move to rented premises when your business takes off?

Look to the future when setting product pricing.  It is better to offer your product at the “right” price at the outset rather than force constant price rises on your customers. If you cannot then compete with the market, your business model may need to be revised unless you can differentiate your product.

Contact Chris to discuss.