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Do you know to identify the relevant costs to your business? Use these four smart questions so you don't miss one in your budget

by , 15 April 2015
You can use several means to identify which costs are relevant to your business and a cost analysis will prove highly useful in a situation like this when you need to clear out any misunderstanding concerning the business budget.

But to know how to maintain a healthy budget and a healthy cash flow, you need to make sure you're not running up unnecessary costs.

So here's how to analyse the costs relevant to your business using these four questions!

Answer the following four questions to analyse your business costs!

1. What type of business do you have, or intend to run?

Notice that if you have a manufacturing business make sure you evaluate all manufacturing costs when doing a cost analysis. These would include direct material, direct labour and overheads. If you intend to run a new business, have a look at the current costs of the same established businesses in the market. This will give you an idea of what it will cost to run your business.

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2. Where is your place of business (are you renting, buying or working from home)?

If you're planning to rent new business premises, you need to add the rental expense onto your cost analysis sheet. Moreover, you can check whether it's more cost effective to buy rather than rent. It is true that when working from home you could save these costs. But you'd still need to add the electricity costs from your home office to the cost analysis sheet. The location of your business might be more important to you. You'd need to look at the risks versus the benefits and determine which is best for your business.

3. How much manufacturing can take place everyday (what is the ability of the machines and workers that you are using)?

At this point, look at the amount of units you can manufacture from each machine. Compare that with the amount of units each worker can manufacture. Assess the costs of these workers versus the machine and calculate which will be better.

4. How much equipment are you using or how much do you need to ensure you're running at maximum capacity?

Look at your warehouse/office space. Work out how much equipment will fit into the space available. Would it be more beneficial to add more equipment to increase your turnover?

Evaluate the maximum capacity of each machine by looking at the amount of units it can produce. Is it effective, or is your equipment old? For example, having six old computers running at 50% capacity may be unnecessarily more expensive than three new computers operating at 100% capacity.

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