What the business actually consumes.
WHAT TO SEPARATE
- Direct costs: those that vary with sales
- Fixed costs: those that do not
- Semi-variable costs: those that step up at thresholds
WHAT EXAMPLES LOOK LIKE
- Direct: materials, delivery, payment charges, contractor time on jobs
- Fixed: rent, salaries, insurance, subscriptions
- Semi-variable: staff added when volume passes a level
WHY THE DISTINCTION MATTERS
It determines profit at different volumes and what happens in a downturn.
WHAT GROSS MARGIN IS
Revenue minus direct costs, as a proportion.
WHY IT MATTERS MOST
It is what covers fixed costs and produces profit.
WHAT A LOW MARGIN MEANS
You need substantial volume to survive.
WHAT TO CALCULATE PER PRODUCT OR SERVICE
Its own margin.
WHY PER ITEM
Businesses routinely sell some things at a loss without knowing.
WHAT COSTS PEOPLE OMIT
Their own time Payment processing charges Delivery Returns and rework Support after the sale
WHY OWN TIME MATTERS
It makes unprofitable work appear profitable.
WHAT TO DO
Apply a rate to your own hours, and include it.
WHAT TO REVIEW
Every recurring cost, annually.
WHAT TO ASK OF EACH
What it produces, and what would happen without it.
WHAT TO CANCEL
Anything nobody can justify.
WHAT TO WATCH
Costs that grow without decision: subscriptions, charges, creeping supplier prices.
