Lone Cat Consulting

Lone Cat Consulting

Any small business needs profit projections to map the way forward. If you’re starting a new venture, financial projections help calculate how much capital you require, and assess the profitability of your proposed business model. If you’re an established business, profit projections guide decisions about growth and change.

In order to manage the financials of your small business effectively, you first need to grasp the difference between variable costs and fixed expenses. Variable costs (also sometimes called direct costs or cost of goods sold) are the costs that go up and down in direct relation to your sales.

If you’re a service business, you may not have any variable costs, but possible variable costs include sales commissions, booking fees, equipment rental, guest consumables or employee/subcontract labour.

If you’re a retailer, your main variable cost is the costs of the goods you buy to resell to customers. Other variable costs, particularly for online retailers, may include packaging and postage.

If you’re a manufacturer, variable costs are the materials you use in order to make things, such as raw materials and production labour. (Think of the neighbourhood kids making lemonade — their variable costs would be lemons and sugar, and perhaps cups.)

Fixed expenses (also sometimes called indirect costs or overheads) are expenses that stay constant, regardless of whether your sales go up and down. Typical fixed expenses for your business may include accounting fees, bank fees, electricity, insurance, motor vehicles, rental, software subscriptions and wages.

If you’re providing a service, you may not have any variable costs associated with your business. However, you may well have some minor costs associated with providing your service and, as soon as your business grows, you will have the cost of hiring employees or contractors to provide the service on behalf of your business.

If you’re unsure whether something is a variable cost or a fixed expense, ask yourself this: Do you spend more on this item as sales increase? If your answer is yes, chances are this item is a variable cost.

If you’re unsure whether something is a variable cost or a fixed expense, ask yourself this: Do you spend more on this item as sales increase? If your answer is yes, chances are this item is a variable cost.

If you’re restricted to buying and selling in different currencies — maybe you buy in British Pounds but sell in Euros — take the time to generate multiple pricing models and make sure you can still be profitable even if the exchange rate changes substantially.

Over the years, I’ve observed that almost any business doing custom manufacture struggles to make a profit. Why? The very nature of creating one-off pieces — whether these are original sculptures, handmade furniture, custom spiral staircases or hand-built guitars — means that you are engaging with the unknown.

The unknown factor may be materials that cost more than you expect, a customer who isn’t happy with the first prototype, underestimating the cost of labour, or many other factors. The time taken up discussing a job with a customer, drawing up designs, communicating changes and working out how to do something is almost always more than you expect.

When you create one-off items, you don’t have the same ability to control your costs in the way that you do when you make the same item over and over again.

Am I warning you never to engage in this kind of business? No, not quite. After all, without custom manufacturers our society would be without potters and artists, sculptures and artisans, furniture makers and craftspeople. However, if you’re planning this kind of business and you want to make a profit, you will need to be particularly brutal about quotations and costings, and you need to be prepared to reject jobs where the margins are too slight.


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