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Consider these five factors during your cost analysis so you don't waste time focusing on the wrong expenses

by , 01 December 2014
A cost analysis is a vital part of preparing your business for future growth. It helps you gather the information you need about your company's financial positions so you can make the best decisions possible.

The problem comes in when you need to decide what costs and expenses you have to include in your cost analysis.

Focusing on the wrong expenses isn't just a waste of time, it will also throw off your cost analysis and render the whole thing useless. That means you'll have to start all over again.

Because no business owner has this kind of time to waste, I'm going to show you five factors you must consider to ensure you don't focus on the wrong expenses during your cost analysis...

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Use these five factors to guarantee you cost analysis focuses on the right expenses 

1. What type of business do you have or want to run?
If you have a manufacturing business, evaluate what manufacturing costs you should include in your cost analysis. These may include direct material, direct labour and overheads. 
If you want to set up a new business, look at the current costs of an established business in the same market. 
2. Where is your business's location (are you renting, buying or working from home)? 
If you want to rent new business premises, add the rental expense to your cost analysis sheet and check if it's more cost effective to buy rather than rent. This will help you see if it's worth including rental expenses at all. 
If you work from home, consider expenses such as electricity, but obviously don't include rent.
3. How much manufacturing can take place every day (what is the ability of the machines and workers you're using)?
Consider whether you'll get more out of using machinery or workers. If you can get more units out of workers, then focus on the cost of labour. If you'll get more out of using machinery, include the expenses of buying new machinery or upgrading your old machinery.
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4. How much equipment are you using or how much do you need to ensure you run at maximum capacity? 
Look at your warehouse/office space. Work out how much equipment fits into the space. Is it more beneficial to add more equipment to increase your turnover? Or would it be better to simply update the equipment you have? 
For example, having six old computers running at 50% capacity may be more expensive than three new computers operating at 100% capacity. If this is the case, it's worth including the expense of upgrading your equipment. 
5. How many workers do you currently employ and how many will you need to keep your business processes running?
You first have to work out how many units you can manufacture per day to make a good profit. This will give you an indication of the amount of resources you need. If you need more resources than you currently have, include the expense of improving your resources.
It will also show you how much direct labour (workers) you need to handle the resources.
Considering these five factors will show you what expenses you need to focus on in the coming years so your business can keep running smoothly and you don't waste time.
There are three more important things to consider when it comes to your cost analysis. Check out the Practical Accountancy Loose Leaf Service to find out what they are. 

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