Understanding the Fundamental Costs for SMBs

When it comes to setting a business budget, owners have two things to manage: income and costs. Income is the amount of money flowing into the business whereas costs include the money flowing out of the business. As a small business ourselves, Saba, Inc. wanted to share a few general SMBs costs that need to be considered.

• Overhead

  Most overhead costs are known and fairly fixed for a year or more. Rent, utilities, office staff, and data processing costs are examples of overhead costs. They can be estimated with reasonable accuracy and should be reflected in the budget accordingly with allowances for growth or problems.

• Costs of Goods and Materials

  Too often, the cost of goods budget reflects only the direct cost of goods and raw materials when it should actually reflect the total cost of ordering, freight, handling, and warehousing of these critical items.

• Cost of Sales

  One of the most critical costs to budget is the cost of generating the revenue, which requires an accurate understanding of the sales force. Some sales people generate large volumes of sales but at low margins while others may generate lower sales but at significantly higher margins. Knowing how your sales force produces income can significantly affect the operating revenue a manager has to work with.

• Cost of Production

  Different employees work at different rates and efficiency. Redoing work or callbacks are the most expensive production costs a business can have. Like the cost of sales, knowing and budgeting for different productivity rates can have a major impact on the bottom line.

• Cost of Marketing

  Aside from the actual manufacturing of a product, businesses must also account for costs to promote that product. Some industries thrive using traditional marketing methods such as print and advertising, but today, many businesses find success using online marketing method such as PPC and search engine optimization which are often cost-efficient and easily scalable.

Every business is different, but whether it is retail store, a service company, or a manufacturing facility, the budget for a business should be based on historical reality but adjusted for actual costs of doing business. Planning smart makes working smart much easier and more productive.