Calculating Costs

For each product or service we must determine the costs behind creating the product or service. In order to figure out selling price, we need to figure out the total costs, pay ourselves and calculate the net profit after everything else is paid. Costs include:  materials, travel time, rent/lease, utilities, other expenses and your own time and salary.

Example:

Cookies

Costs

Consumables

• Chocolate chips
• Flour
• Eggs
• Butter
• Sugar
• Vanilla
• Parchment paper
• Gas or electricity to run oven
• Packaging or box for sale

Equipment (reusable but needs occasional replacement so calculate lifetime value/use)

• Baking pan
• Oven 
• Measuring cups, spoons etc.
• Container to put cookies in (if you will reuse it)

Other Costs

• Cost to drive to grocery store
• Cost for table or store to sell cookies
• Your cost per hour (what would you pay yourself?)

The cost per item is determined by how much of each item you use. If a bag of chocolate chips cost $3 and you use half a bag, the cost for your batch of cookies is $1.50.  Divide all costs by number of cookies to get cost per cookie.

Price

So now you know how much it costs to make a cookie. Your price for sale needs to be higher than your total costs. You will want to have profit to allow you to buy more supplies and keep money in the bank.

The Cost of Time

We all have skills – things we are good at.  We also have things we are bad at doing. This is where delegation comes in. The person who is skilled at a task should be the one performing the task, not the person who lacks the skill.

While we still need to learn new skills, if we cannot easily learn, it can take too much time away from completing tasks.

If no team members have the skill, hire someone to perform the task.

The Team

As we build our teams, we need to assess team skills. 

• • What skills does your team possess?
  • Who is your math or finance person?
  • Who is your creative person?
  • Who is your people person?
  • What skills does your team lack?

GENERATING INCOME

• How will you make money?
• How will you finance your project?

All businesses have expenses as explored in the cost sector.

HOW TO GENERATE INCOME (REVENUE)

That means we need to have a way to create revenue and cover expenses.

•  Sell a product
• Sell a service
• Apply to and receive a grant
• Ask for donations
• Apply for a loan (friends and family or bank)

Break down the total known costs for your business based on the factors above. Are there any other costs or expenses to consider? What do you need to make to cover your basic costs. Consider how else you might reduce or mitigate costs. Apply your list of costs to the Lean Model Canvas. You can also complete the revenue section of the Lean Model Canvas.