The focus of any business is fundamentally to make a profit, and the more profit,…
The Major Cost of Minor Increases
I believe that Benjamin Franklin made a mistake in his famous quote:
In this world nothing is certain but death and taxes.
He should also have included that rising costs are also a certainty.
Ok, so some costs do go down. I remember when the first ‘mobile’ phone came out, it was large, heavy and cost around $10,000 at the time. So, yes some costs do come down. However, when you’re in business, the chances are that your costs will increase, often just small increments that you don’t really think much of but over time they can add up.
I was talking to a client the other day who told me about changes to the Award rates applying to their award where they have different rates for different times of the day and whilst most of the rates increased by 3.7%, one of the rates increased by a whopping 36%.
What was interesting about the initial part of the conversation was that the information about the Award increase was almost an afterthought. The person hadn’t really thought it about more than knowing that the costs would increase. I think the only reason it was raised was due to the big rate increase. If the Award rates had only been the ‘CPI’ type increase, it wouldn’t have been mentioned.
However, information like that sets me off down a rabbit hole to see what it really means for the business:
The resulting calculation showed an overall increase of 1.6% in the cost of sales. Now, you might think, 1.6%, that’s ok, it’s minor. But then we took the numbers a further step and on an annual basis based on a turnover of say $1M, that’s $16,000 less profit.
Depending on the profit of the business, that might be ok too. Let’s assume for a moment that the business was making a 10% profit, that is, $100,000. That $100,000 will now be reduced to $84,000, making it an effective 16% reduction in profit.
If the business was making a 5% profit, that is $50,000, then the profit after the pay increases would be $34,000, making the pay increase an effective 32% reduction in profit.
Have I got your attention now?
I’m not trying to bamboozle you with the numbers; however, it’s really important to look at what the real effect of a minor increase is on the bottom line profit of your business.
It’s only when you look at it in detail like this that you will see the major impact it will have on your business results and give you the information to make decisions around ongoing staffing levels and efficiencies, whether to increase sales prices, whether there are other costs that can and will need to be eliminated and so on.
Next time you have a minor price increase in any cost in your business, follow the numbers through to the profit and see just how major the cost is.
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