How much money do you need to make your business work and turn a profit?
In this video we’re going to be talking about cost structure and why it’s important for businesses to understand the numbers to build a profitable business.
Hi, my name is Aidan, and I run a company called Proper Video. In our Business Model Canvas series, we are joined by an amazing business coach called Paul Aisthorpe from a company called Scale-Ability.
I’ve personally been mentored by Paul and whilst with him he helps me work through something called the Business Model Canvas. The Business Model Canvas is a one page business plan developed by an organization called strategyzer. It helped me so much, and I’ve now interviewed Paul about each building block of the Business Model Canvas, hoping that you will gain just as much value from it as I did.
So let’s jump in.
Yes, ok Paul, in this video we’re going to talk about cost structure. Personally I think it’s really important for businesses to understand the cost structure, because you know they workout how much they actually need to make to make it a viable business. So, just give me a quick explanation on what we mean by cost structure
Absolutely when I think you know what you said there is absolutely relevant. If we don’t understand what the key costs are in our business then we don’t know how we’re going to create value the way because we need to create we talked about value propositions in terms of delivering value to our clients. That value that we deliver to clients creates value in our business. So understanding what costs we have, linked with the resources and activities that we talked about earlier, helps us understand how we create that value in our business.
I’m just gonna to ask you to give me some examples of different costs that businesses could have.
Well I think when you’re looking at different types of businesses as well, we start to need we need to understand what types of costs of going up going on in that business. So for example, a production company, who are making something, and we talked about construction company that I work with, they’re make windows and doors. There are direct costs that will lead to produce in the actual windows itself, ready for sale. And then there are indirect costs of what otherwise could be known as overheads those other costs that the business incur that they still need to pay for, and I think there’s things that we need to understand about costs other costs as well. What are we incurring as costs on a regular basis day by day and what sort of intermittent costs or what costs might we incur in our business over time? So, you know, some examples of that might be, you know in terms of marketing is a good example. We might not spend on marketing every month, but we might do some PR, which you know two or three times a year, which might cost you know some significant sums of money, which we need to understand what that is. And when we need to pair that out,
What are the cost? So we’ve talked about manufacturing, talks about soft software and things like that. And sort of like for retailers will be quite a lot of logistical costs, and things like that.
Absolutely absolute retailers, and you think about online retailers as well. You know, their, their cost infrastructures are heavily around warehousing, logistics, storage, distribution those types of costs. And those are all ongoing costs. And direct cost of actually getting the product to the customer’s door, you know the manufacturer again, you know we talking about the machinery, lighting and heating and people, to actually make those things, those direct costs, but the lenders are the costs that we talked about that are sort of not diving into the associates with actually getting your product or service, to the door of your clients.
Yes and that’s you know, great example really and it’s about sort of like ironing it out. For your cost structure ironing it out exactly how much individual elements costs to make a t-shirt exactly. For example, you know, you’ve got the cotton and then you’ve got to run the cotton through the mill. So from getting it from one end of the mill to the other that’ll be seven pence actually buying it, or be a six pence per meter. I mean, you the you add that up and then you ended up coming to a, an overall cost overall of like price that you can retail products or service, at
Absolutely and break it down into that detail, So you’d know what, you know, the the retail cost might be for a unit that you produce in, is really important. Understanding the overall cost first of all, have been also attribute that to each item that you produce is really important. And I think the great example you talked about earlier about retailers, if you think about what they’ve had to go through over recent years again, and particularly right now during this pandemic, is that cost structure is going to shift slightly. Perhaps because it’s going from premises, stores, all that rent, that rental payments that are gonna go out, and running costs for those stores, You know we’ve seen lots of examples of retailers shutting down the stores, the banking world shutting lots of offices, and premises, and because things are going online, so costs are shifting from one area, so they’ve put in lots more costs into perhaps online, marketing, websites, social media.
So we’ve given some examples Paul, of different types of costs that businesses might have. How can they go about putting that all into some sort of spreadsheet, or work it all out so that they have a full understanding of their cost structure?
Great question again and I think, depending on the type of business, it may be that you need some support in terms of putting that cost structure in place, to be able to build up as we talked about, what does it cost to make a unit of this product that we’re selling, and forecasting that forward spreadsheets Excel spreadsheets, great way doing that. But this is where it might link into other parts of the Business Model Canvas where a key partner might be required, a financial person, accountants, financial person expert, that can help you put those cost structures in place, observe those cost structures, and do those financial forecast you might need, based on what you know your cost are, So, you know, that’s a good place to start. Some businesses are a lot simpler out there obviously. In terms of understanding the costs. Others are` more complex. And I think it’s about your level of capability, when it comes to understanding numbers, in terms of what you do next.
[End of Interview]
So there, we have it. I hope that’s given you some insight on the different costs a business may have and how applying costs will help you decide whether your business is a viable, or profitable option. Join us next week where we’re going to be talking about revenue streams. Maybe you’d like to learn more, or speak to myself or Paul, there’s a link in the description, where you can contact us. Thank you.
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