How To Cost A Job? Why Companies Are Missing The Plot, Part One

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'Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you.' – Carl Sandburg.

Can I ask you a question, what is it that you sell? I need you to think a little before answering. Most will answer something about what they produce. A printer will say prints, a nurse perhaps nursing, a teacher perhaps knowledge, a housewife might say a pleasant place to stay and security for the children.

If you pause and analyse these answers, it should be clear that we all have choices on what to produce, but one thing that is common, is time. We are given a finite amount, no one knows when we will depart this beautiful planet. We therefore have a choice of how we use this time and what value we add to our fellow citizens in exchange for their coins, made with their choice of time utilisation.

Ultimately, we can make underpants, tend to the sick, or print, but what we sell is only our time. It's in acquiring skills and using our time effectively that makes our time more valuable than the next guy's and hence our ability of increasing our value.

What Is Your Time Worth? This Is The Pressing Question.

This is a complicated question but can be broken down into easy-to-understand parts. Once you grasp these, you will realise how to maximise your value to society and therefore your wealth-producing capacity.

Fixed Costs

In any business, we need to know what we must pay even if we produce nothing. These are commonly called fixed costs. Make a list of of all your fixed costs. These will be salaries, rent, leases etc, things you are committed to paying whether you produce anything or nothing.

As an example, I will use a fixed cost structure of R40000 per month, (please plug your own figures in here). This would be a typical Mom and Pop shop, where Mom and Dad are the major salary earners (using money to pay for food and the kids' education), they have a printer and computer and are using the garage for production.

What Is Their Time Worth Without Producing A Thing?

R40000 divided by 22 days (number of working days in a month) is R1818 a day. R1818 divided by eight (working hours in a day) is R227 an hour. 227 divided by 60 (number of minutes in an hour) is R3.78 per minute.

What Does This Tell Us?

Mom and Pop need to be billing R3.78 a minute (or R227 an hour) just to cover fixed costs (R40K a month).

Variable Costs

As soon as they start producing, they will need to buy materials and services to be able to produce these jobs. These include inks, vinyl, invoice paper, telephone calls, electricity etc.

On average, a state-of-the-art middle of the range large format printer can produce 14 square metres an hour at standard quality. Ink costs R16 a square metre on average and media is R20 per square metre for run-of-the-mill vinyl, which adds up to R36 per square metre. R36 divided 14 gives us R504 an hour or R8.40 a minute.

However, this presumes the shop is always printing, that all these prints get sold and that there are no returns or failures and the printer never breaks down. This is a utopia you need to aim for, but it is not realistic, especially if you start trying to save variable costs by buying inferior inks or inferior vinyl's. Job failures will increase and the printer will need more servicing as breakdowns climb—fixed costs don't disappear while the printer is standing idle.

Let's assume for our case study that 50% of the time the printer is standing idle and that finishing the job or fixing bad jobs is taking up the rest of your time. Please analyse your own shop by measuring how many square metres you INVOICE everyday, this is the only measure.

In the above example, Mom and Pop invoices out seven square metres an hour multiplied by eight, which equals 56 square metres. Our fixed costs for the day are R1818 and our variable costs are 56 multiplied by R36, which equals R2016. The cost per square metre fixed cost recovery is R32 (R1818 divided by 56sqm). Therefore, our total cost per square metre is R36 plus R32, this equals R68 per square metre.

If we increase production to 112 square metres invoiced a day (full utilisation of our printer) our costs drop dramatically. Variable costs, vinyl and ink is the same at R36 per square metre, but our fixed costs drops (R1818 divided by 112 gives us R16 a square metre). Total cost per square metre is therefore R16 plus R36, which equals R52 per square metre. The massive saving of R112 (R68-R52) equates to a saving of R1792 for the day, or R39424 a month. Fixed costs are now almost paid for, just by our increased efficiency.

The lesson here is simple. Focus on increasing your productivity: the use of your time. Then profits will start accumulating rapidly. Too many people focus on cheap materials etc. and then can't understand why their customers don't come back, or are always sending jobs back for repairs.

Costs Are Not Simple

Mom and Pop are really busy but can't achieve full utilisation of their production equipment. They have to answer the phone, they have to talk to customers and they need to deliver orders. They don't want to add more staff as they are barely making ends meet. STOP! Look at the bottlenecks that are preventing you from producing and turning your work into invoices. People who are bottlenecks tend to feel needed and have a heroic air about them. It sometimes needs an honest wife or husband to stand up and say, 'You're making us inefficient'.

Now look at ways of getting rid of those bottlenecks, by, for example, hiring a driver or receptionist. If this allows you to use your time to produce and invoice more, then the cost is justifiable. Perhaps you need to buy that expensive ladder, because it allows you to erect five jobs instead of three in a day. Look for those productivity enhancers, you wont regret them. It may be painful to spend that money on day one, but one day you will wonder why you didn't do
it sooner.

If you constantly look at increasing your output and customers are buying what you offer and not doubting your quality or sending it back, (more about quality versus quantity in the next two parts of this series) without excessively increasing your costs, you will be on a winning curve.

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