Setting Prices in Times of Inflation- How Fi Know How Much Fi Charge



· 8 min read
Break even analysis for businesses

Your break even point is the stage of the business where all the money you make is equal to your costs. Once you determine what this number is, it becomes easier to decide if you need to increase prices and reduce expenses.

It helps you to identify that point where your business becomes sustainable.

Inflation Accounting for higher prices

As we continue living through these times of the worst inflation the world has seen in years, it is more important than ever before for your business to have all the necessary information to help you succeed.

Setting adequate pricing and determining realistic sales targets are important. This will help you avoid being one of those businesses that has to close its door due to lack of information.

This guide has been created to help you understand how to identify the costs that your business incur, classify them, and use the information you have to determine the cost you spend when producing your products.

At the end of this post, we even have a free offer to a spreadsheet, with predetermined formulas, to help you understand the number of products you will need to sell, to cover your expenses.

But before we get into that, we first need to understand the Cost of Goods Sold (COGS).

What is the Cost of Goods Sold?

Dah weh dat?

How did you determine the price you charge for the products or services that you are offering? Do you know what is the minimum amount of products that you must sell to breakeven based on your prices?

These are often questions that small businesses never fully take the time to understand. Yet, they can easily be determined by applying the COGS and breakeven equation to the processes of a business.

By doing this, you can better understand what your company’s bottom line is. It also helps you to understand how profitable your business is.

COGS is the cost your company must cover to be able to do business. If COGS increases, your profit will in turn decrease.

COGS includes all the direct costs associated with producing the goods of a company. It is made up of all the labor and material cost that a company incurs for the production of their goods.

It doesn’t include anything that cannot be directly tied to the production of a good or service. So expenses that fall under distribution, sales, marketing and so on would not be included as part of COGS.

It can be divided into direct and indirect cost.

How to Identify Direct Cost

Direct Cost- These are the costs your company experiences when producing or purchasing a good that you are going to be selling.

For example, let’s say that you are selling food. The cost of the ingredients used along with the salary or wage paid to the person who spends all their time making the food, would be included as direct cost.

How to Identify Indirect Cost

Indirect Cost- Indirect cost are costs related to rental of production facility, machine and labor that cannot be directly tied to the production of goods or services.

For example, the labor cost we include here would be for employees who don’t have a direct association with making the product, yet are still considered important in the production process such as the person responsible for taking stock, or packaging the product.

When you have a business, it is very important to assign a percentage of the rent, utilities or other shared costs to each product or cycle of the business and remain consistent with it. This will help you share the costs among all the products or services offered, and ensure that it is adequately accounted for.

The Cost of Goods Sold Formula

The basic COGS formula is

Starting inventory + purchases − ending inventory = cost of goods sold

How to determine starting inventory

This is the ending inventory from the previous cycle. It includes all the raw materials, work in progress, finished goods, and any supplies that are part of the items you sell.

It is important that you account for these items carefully. Usually, companies will conduct a physical check of their inventory at the end of every cycle.

Although having systems to track as you go, a physical inventory allows you to make note of things that may have deviated from the paperwork such as theft or damaged goods.

How to calculate purchases for a period

Most businesses are constantly adding to their inventory. It is very important to keep track of all these purchases as they come in. All invoices and records are to be kept to ensure that your valuation is always up to date.

Invoices are to be properly recorded, and items are to be double checked against them as they are stocked so that any deviations can be caught.

How to identify ending inventory

This is determined by counting up and reporting all the material, work in progress, and finished goods that remain at the end of an accounting cycle. Here, you can also account for damaged or obsolete items by removing their value from the current inventory.

When you are valuing your inventory, it is important to be consistent with the accounting method that you wish to use. This will help you to have accurate and meaningful numbers to help you make better decisions.

Cost of Goods Sold

The result after applying this formula, would then be the cost of all the goods you sold during that specific period. It is subtracted from the total sales that your company made, to help you determine your Gross Profit.

After you have calculated your cost of goods sold, you can then use the information that you have to set a more realistic price. A price that helps you to cover your expenses while remaining profitable.

What is the break even point for my business

When you have determined the adequate selling price for your product, you can then turn your attention to break even analysis. It can help you to understand if your prices are too low, or if your expenses are too high.

Conducting a break even analysis can tell you how much of the product you need to sell, or how much money you need to make to hit that break even point.

Your sales targets should then be set upward of that number to ensure that your company remains profitable.

The Challenge:

Take some time out this week to determine the cost of goods sold for your product. Use this information to set a selling price, or evaluate your current selling price. Then, perform a break even analysis to set sales targets for the period.

I created a free spreadsheet that you can use to determine your breakeven point. Click HERE to open a customer account with Giggedbz, and receive an email with the spreadsheet.

As prices increase, you can set better sales targets for your business. If you already have a customer account with us, simply reply to this email with “send break even analysis” in the body of the email, and we will send you the spreadsheet.

Disclaimer: Not Financial Advice
None of the content brought to you on the Giggedbz Hook Mi Up Blog page is intended to be financial advice. We provide content for educational and entertainment purposes only. You should consult a financial professional for advice.

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