Improve Your Business: Basics (ILO, 1999, 188 p.)

Improve Your Business: Basics (ILO, 1999, 188 p.) MARKETING (introduction...) Understand your customers Satisfy your customers 1. Product: What products or services to provide 2. Price: What prices to charge 3. Place: How to reach your customers 4. Promotion: How to attract customers to buy Review Summary What did you learn in this chapter?

Improve Your Business: Basics (ILO, 1999, 188 p.)

MARKETING

IN THIS CHAPTER YOU WILL LEARN HOW TO

Discover what kinds of products customers want
Provide the products they want
Decide what price to charge for these products
Find the best location to sell the product
Attract customers to your business

Understand your customers

WHAT IS MARKETING?

Marketing is everything you do to satisfy the needs of your customers and make a profit by:

· providing the products or services they need
· setting prices that they are willing to pay
· getting your products or services to them
· informing and attracting them to buy your products or services.

IS MARKETING IMPORTANT?

Customers are the most important people for your business. If you do not provide what they want, at prices they are willing to pay, and treat them with respect, they will buy somewhere else. Without customers there will be no sales and your business will have to close down.

Satisfied customers will come back and buy more from your business. They will tell their friends and others about your products and your business. More satisfied customers mean larger sales and bigger profits.

Most businesses do not sell as much as they could and many do not understand why. Business people need to know as much as possible about their customers and what they want so they can serve them better. This is the starting point for marketing.

WHO ARE YOUR CUSTOMERS?

Your customers are the people or other businesses who want your products or services and are willing to pay for them.

Your customers are:

· the people who buy from you now
· the people you hope will buy from you in the future
· the people who stopped buying from you but you hope to get back.

Figure

Figure

Here are some examples:

· In most areas, there is a demand for reliable and affordable transport. The customers are all the people who need transport and are willing to pay for it.

· In many areas, there is a demand for school uniforms. The school children use the school uniforms but they are not the customers. The parents buy the uniforms for their children. Therefore, the customers for the school uniforms are the parents, or other people who are willing to pay for the uniforms.

· A tailor’s shop makes protective clothing like coats and overalls. They are used by shop assistants, carpenters, and other businesses. The tailor’s shop sells their products directly to other businesses. So, owners and managers of those businesses are their customers.

LEARN ABOUT YOUR CUSTOMERS AND COMPETITORS

Customers buy goods or services to satisfy different kinds of needs and wants. For example, customers buy:

· bicycles because they need transport
· nice clothes because they want to look attractive
· radios because they want information and entertainment
· coats and overalls because they need to protect their clothes.

It is important to know as much as possible about your customers and what they need and want. When you understand your customers’ needs you can decide what products or services to provide. Do market research to understand your customers, make better decisions and increase your sales.

Do market research

To find out about your customers and competitors, ask yourself:

· Which different kinds of customers am I trying to sell to?
· What products or services do they want? Why do they want them?
· What prices are they willing to pay?
· Where are the customers and where do they usually buy?
· When do they buy?
· How often and how much do they buy?
· Who are my competitors, the other businesses selling products and services similar to mine? How good are my competitors?

Finding answers to these kinds of questions is called market research. Market research is very important for your business. It means getting information about your customers and competitors.

But it is not enough to know who your customers are and what they want. You must also find out if there are enough customers. Not everybody will buy from your business.

Reliable Tailors used to make school uniforms. The market for school uniforms is large. But by doing market research Reliable Tailors found out that there are too many businesses making school uniforms and that sales for each business are very low.

Reliable Tailors decided to find out about the customers for other products, for example, overalls and protective coats. This is how they found out how many customers there are for protective coats. You can learn about your customers in the same way:

1. Reliable Tailors counted the number of shops in town. There were 80 shops altogether.

2. Reliable Tailors asked 10 shops how often they buy new protective coats for their shop assistants. Most said they buy twice every year. Most shops have three people who need protective coats. This means each shop buys six protective coats each year.

3. Some customers will not buy from Reliable Tailors. They will buy from other tailors. Out of the 80 shops in town, Reliable Tailors think they can sell to 40 shops.

4. Reliable Tailors expect to sell 240 protective coats per year.

All businesses need to understand their customers and know about their competitors. Doing market research will help you to satisfy your customers by making decisions on:

· what products or services to sell
· what prices to charge
· how to get your products to your customers
· how to inform customers and attract them to buy.

Market research can be done in many practical ways by you and your employees. Here are some examples of how you can find out more about your customers and competitors:

Talk to your customers or ask them to fill in a questionnaire. Ask them, for example:

· why they buy from you

· if they are satisfied with your goods or services and the way they are treated at your business

· if there are other goods or services they would like to buy.

Listen to what your customers say to each other about your business and your goods and services.

Find out why some customers do not stop to buy from your business. Think of yourself. When you want to buy something, why do you go to one business and not to another? Is it because one business has a better product, a better price, better services, or is nearer to you?

Study your competitors’ businesses. Find out about:

· their products or services, for example, quality and design

· what prices they charge

· how they attract customers to buy

· what customers say to each other about the goods and services in your competitors’ businesses

· why customers buy from your competitors’ businesses instead of from your business.

Ask suppliers, other businesses and business friends:

· which goods sell well in their businesses
· what they think about your products
· what they think about your competitors’ products.

Check your order books, your sales records and your stock records to find out which goods or services sell well.

Read newspapers, catalogues, trade journals and magazines to get information and ideas on new products or services.

Watch TV and listen to the radio to find out what is popular at the moment and to see what other businesses advertise and how they advertise.

Market research helps a business to know more about their customers and competitors. On the next page you can see how a tailoring business put together the information from their market research.

1. In column 1, write the products or services you sell.

2. In column 2, describe the customers for each product or service. Who are the people who want that product or service and are willing to pay for it? For example:

· Are they mostly men, women or children?
· Are they young or old? What type of work do they do?
· Are their incomes low or high?
· Where do they live and where do they buy? In rural areas, in town, near your business or far away?

3. In column 3, write down how often and when your customers buy each product or service. Is it every day, every week, every month, every year, in winter, in summer, on pay day, or after the harvest?

4. In column 4, write down what price you charge for each product or service.

5. In column 5, write down what your customers think about your product or your service. For example:

· Do they like the design, the colours, the sizes? Why?
· Do your customers want products or services that you do not have?

6. In column 6, write down other businesses, your competitors, who sell the same or similar products or services as you do. What is special about their businesses, their products or their services?

7. In column 7, write down the prices your competitors charge for each product.

Satisfy your customers

You have

· found out about your customers and competitors
· found out if there are enough customers.

Now, use the information about your customers to satisfy their needs. To satisfy the needs of your customers, improve your sales and make a profit, you need to find out:

· what product or service your customers want
· what price your customers are willing to pay
· at what place your business should be so you can reach your customers
· what promotion you can use to inform your customers and attract them to buy your products or services.

These are called the four Ps of marketing. They all start with a P: Product, Price, Place, and Promotion. So they are easy to remember.

To satisfy your customers and increase your sales, you will need to learn about and use all four Ps of marketing. Satisfied customers will come back to buy more from your business and will tell other people to buy from your business.

All four Ps are very important and must be given strong emphasis. If your business is weak in one or more Ps, you may not be able to satisfy your customers. Your business is in danger and may fail.

Timing of the four Ps is important. The right product, for the right price, at the right place and supported by the right promotion, must be available at the right time. The right time is when the customers require the product.

We will look at each of the Ps one at a time.

1. Product: What products or services to provide

To be successful in business you must have the products or services your customers want. This is called Product and is the first P of marketing.

FIND OUT WHAT CUSTOMERS NEED

Customers buy goods and services to satisfy different needs. For example,

· cold drinks satisfy a need to feel cool in hot weather
· bicycles satisfy a need for transport
· radios satisfy a need for news and entertainment
· clothes satisfy a need to wear something comfortable and a need to feel attractive.

Figure

A successful business finds out what customers want and need. The business provides the products or services to satisfy those needs.

Sunshine Restaurant is a small restaurant in a good location, where customers can have a quick meal. This is how Sunshine Restaurant satisfies their customers’ needs:

· When they first opened, Sunshine Restaurant only sold cakes and biscuits. But the customers asked for more to choose from, so Sunshine Restaurant started to offer different kinds of food, such as sandwiches and pies.

· Later on, customers began to ask for cooked food for lunch. Sunshine Restaurant bought a stove and started serving cooked meals.

· Sunshine Restaurant used to have small paper bags for all take-away foods. Customers started to complain. Now they also use boxes for some soft foods.

Always listen to what your customers like and do not like. When their needs change, change your products and services to satisfy the new needs. Do more market research. When you know what your customers want, you can provide those products or services and increase your sales.

PROVIDE WHAT YOUR CUSTOMERS WANT

Customers want to look at different products so that they can choose what they like best. For example,

· some customers want a different design
· some customers want high quality and are willing to pay extra for it.

If you always provide products or services of the quality your customers want, they will trust you and your business.

Often ask yourself these kinds of questions:

· What products or services do I sell?
· Why did I decide to sell these products?
· Do I have the products customers want?
· Do I keep products that do not sell well?

If the answers to the questions tell you that customers want different products or services, you can:

· make or sell completely new products, or
· improve what you already make and sell by changing something about your product:

If you sell products which need packaging, you can also change the packaging. Packaging protects your products and makes them easier to handle. Packaging adds to your costs. But packaging can also make your products more attractive and help you increase your sales.

You may decide that products and services other businesses provide are much better than the products or services you can afford to make or sell. The changes you would need to make to your products are too big and would cost too much. When this happens, you decide to stop selling that product. By doing market research, you can decide on a better product or service for your business to sell.

LOOK FOR NEW IDEAS

Your products may not sell very well. Lots of other businesses may sell the same products. Customers may not want your products any more. If the products you sell do not make much profit, think of new ideas. Here are some examples:

If you only make and sell household furniture,

· find new types of customers such as schools and offices by selling school desks, shelves or office furniture.

If you are selling bread,

· find more customers such as restaurants, hospitals and schools.

If you are selling vegetables and fruit,

· think about what new products you can make from vegetables and fruit. You can, for example, make juice and marmalade from oranges.

Before you start making new products, make sure you do market research:

· Think of ideas and ask others. Get as many ideas as possible.

· Find out which of those ideas can be made into products that customers would like and would be willing to pay for.

· Make sure there are enough customers who want your new products.

2. Price: What prices to charge

Price is the second P of marketing. Setting prices can be difficult but is very important. Your business may have very good products or services, but if your prices are wrong, you will not sell much.

When you work out a price on a product or a service, you need to know how cost, price and profit work together:

Your total profit from sales depends on:

· how much profit you make on each product or service
· how many of each product or service you sell.

Tasty Bread is a bakery. One of the products they make are cakes which customers buy at the bakery. Tasty Bread have tried both low and high prices:

So, you can make a large total profit on a low price. It all depends on how many items of a product you sell and how much profit you make on each item.

HOW TO SET YOUR PRICES

In general, your prices must be:

· low enough to attract customers to buy, and
· high enough to give your business a profit.

You must have certain information before you decide what prices to charge your customers. To set your prices you need to:

· know your costs
· know how much customers are willing to pay
· know your competitors’ prices
· know how to make your prices more attractive.

Know your costs

You must know the total costs of making and selling each product or service. The total costs include materials, labour, rent, electricity, transport and all other costs in your business. To make a profit, your price must be higher than your total costs for the product.

Look at how Sunshine Restaurant set prices. First they must know their costs. The total costs of making one pie are 2 NU. To make a profit, they must sell each pie for more than 2 NU.

Know how much customers are willing to pay

Customers must be willing to pay your prices. If you set a price which is too high, you will soon know because you will sell very little or nothing.

Sunshine Restaurant asked many customers how much they were willing to pay for a pie. Almost all of them said that 3.50 NU is too much money to pay for a pie. Many of them said they would buy a pie if it does not cost more than 3.25 NU. Sunshine Restaurant now knows that the price for pies should be somewhere between 2.00 NU and 3.25 NU:

· 2.00 NU is the total cost for a pie
· 3.25 NU is the highest price the customers are willing to pay.

If the price customers are willing to pay is lower than your costs, try to cut your costs. If you cannot cut your costs, maybe you need to find another product or service to sell.

Know your competitors’ prices

Find out how much your competitors charge for products or services which are the same or similar to yours.

In general,

· if your prices are lower than your competitors’, you may attract more customers to buy from your business

· if your prices are higher than your competitors’, your customers may buy from your competitors.

There may be a reason why you want to charge a higher or lower price than other businesses.

You may want to charge a lower price, for example:

· if your product or service is new and people do not yet know about it
· if you want to attract new customers.

You may want to charge a higher price, for example:

· if customers feel that your product or service is better than the competitors’
· if you provide some extra service such as longer opening hours, free delivery or a good guarantee.

Sunshine Restaurant found out that most competitors charge 3.25 NU for pies. They now have a lot of information about prices for pies:

· the cost for a pie......................................... 2.00 NU
· the price customers are willing to pay........ 3.25 NU
· competitors’ prices for pies........................ 3.25 NU

Sunshine Restaurant has not yet decided what price to charge for pies. They are thinking of charging 3.00 NU. If customers buy from other places, they have to pay 3.25 NU.

Know how to make your prices more attractive

There are many ways to make your prices sound more attractive to your customers. Sunshine Restaurant decided on a price of 2.99 NU for the pies. 2.99 NU sounds much less than 3.00 NU, even though there is only one cent difference.

To attract customers to come to your business, you can sometimes use special offers - even with low profits. When your customers come for the special offers, they often buy other products as well.

A discount also means a lower price. You can get a discount from a supplier. You can give a discount to a customer. Here are some examples:

3. Place: How to reach your customers

Your business may have good products at prices that customers are willing to pay, but sales may still be low. The reason may be that customers do not know where to buy your products or services.

The third P in marketing is called Place. Place means location - where your business is. Location is especially important for retailers and service operators, who need to be where it is convenient for their customers.-

Place also means different ways of getting your products or services to your customers. This is called distribution. Distribution is especially important for manufacturers.

LOCATION - WHERE YOUR BUSINESS IS

Before Sunshine Restaurant was started the owner thought about where to locate the business. She wanted to know which place would be best for her customers.

DISTRIBUTION - GETTING YOUR PRODUCTS TO YOUR CUSTOMERS

For manufacturers it is not always important to be near their customers. It is often more important to have:

· a cheap rent
· a reliable and convenient supply of raw materials.

If your business is not where your customers are, you must find ways to get your products to where it is easy for customers to buy. This is called distribution. Distribution is particularly important for manufacturers.

There are different ways to distribute your products to your customers:

· You can sell directly to the customers who use your products. This is called direct distribution.

· You can sell to other businesses which then sell your goods to consumers or other businesses. Those businesses are mostly retailers or wholesalers. This is called retail distribution and wholesale distribution.

Direct distribution

Direct distribution means selling your products directly to the customers who use them.

When you sell your products directly to the customers who use them, you can talk to them and find out what they like, want and can afford. So, direct distribution is most useful for those manufacturers who make products to each customer’s order.

Direct distribution is useful for some businesses. But it takes time and it can be expensive for your business. For example, think of the costs for transport, wages or your salary, for the time you or your employees spend selling or delivering goods to customers.

Retail distribution

Retail distribution means selling your products to shops and stores who then sell to the customers who use the products.

Retail distribution is useful for businesses that make products in large quantities. Retailers often reach more customers in a larger area than your business can do on its own. So, when you sell your products to retailers you reach more customers, your sales may increase and your business can grow.

Retailers can do a lot of work that your business has to do on its own if you sell directly to the customers who use your products. For example, retailers:

· keep in contact with customers. This gives you more time for production and other important activities.

· stock your products. This helps your business to have less money tied up in stock.

· help promote your products by advertising, etc.

Retailers do a lot of work that your business would have to pay for otherwise. Because of that you charge them a lower price than you would charge the customers who use your products. On the other hand, retailers often pay you immediately when they get your products.

Wholesale distribution

Wholesale distribution means selling your products in very large quantities to wholesalers who sell them in smaller quantities to retailers.

Wholesale distribution is useful for businesses that make products in very large quantities. Wholesalers can normally reach even more customers in a larger area than retailers can. So, when you sell your products to wholesalers, you reach even more customers, your sales may increase and your business can grow.

Wholesalers sell to retailers who then sell to the customers who use your products. Like retailers, wholesalers do a lot of work that your business otherwise would have to do on its own. For example, wholesalers:

· keep in contact with retailers who buy your products
· stock and transport your products
· promote your products.

Wholesalers do a lot of work that your business would have to pay for otherwise and can help you to reach many more customers in a very large area. Because of that you normally charge them an even lower price than you would charge a retailer.

Which type of distribution is best for your business?

Each type of distribution is useful for different types of businesses. Before you decide if you want to change your distribution, think about:

Your products

· Do you make standard products or products to each customer’s order?
· Do you make low-priced products or high-priced products?
· Do you provide any special service with your products?

Your customers

· Do you have many or few customers?
· Where are your customers? Nearby or far away?
· How much do they usually buy?

Your business

· What does your business have difficulties with? Would your business improve if someone else does the selling, stocking, promoting, etc.?

· What can your business do best on its own? If you sell to retailers or wholesalers, will your business improve? How?

Your sales, costs and profit

· How much can you sell with each type of distribution?

· Can you make and sell enough to supply retailers or wholesalers with the quantities they want?

· Which type of distribution will give your business the highest sales and the highest profit?

4. Promotion: How to attract customers to buy

Your business may be in a good place, have good products at prices that customers are willing to pay, but your sales may still be low. Why?

Maybe it is because you do not tell people about your business and what it can offer. This is called Promotion and is the fourth P of marketing. Promotion means informing and attracting people to buy your products or services.

Decide how much you can spend on promotion and what types of promotion to use. Promotion sometimes costs a lot and it is important to use the best type of promotion for your business.

Do not sit and wait for customers to come to you. Do promotion, sell more and increase your profit by:

· advertising - making customers interested
· sales promotion - getting customers to buy more
· publicity - getting free promotion
· improving your skills as a salesperson.

ADVERTISING

Advertising is giving information to people to make them more interested in buying your goods or services. Let us look at some ways to do good advertising for your business.

Signs

Use signs so that people know and remember the name of your business, what it sells, where it is, when it is open, and so on. Bright colours, clear writing and a picture or symbol will make more people see your signs. Do not put too much information on your signs. It is difficult to read a sign with a lot of information. It is a good idea to find a good, local sign-painter to help you.

Boards, posters and leaflets

Use boards, posters and leaflets to tell customers about special offers, discounts, new products, and so on. You can use paper or chalk and a chalkboard.

Write on the boards, posters and leaflets. Make your posters big enough so that people will notice them. Use the information from your market research and put the posters where many people can see them. Give leaflets to people who may be interested in buying your products or services.

Business cards, price lists, special letters and photos

Use business cards to tell people who you are, the name of your business, your location and what you sell. Use a price list to tell people about all the products you sell and how much they cost. Write special letters to promote your business to people you think will be interested in buying your products or services.

You can use a rubber stamp to make your own business cards and letterheads. To give a good impression make sure that your letters are neat and that the information is clear. Ask customers to give your price lists and business cards to their friends and other people who may be interested in your products or services.

Newspapers, radio and television

· Advertising in the local newspaper is sometimes good but it is usually quite expensive.

· Advertising on the radio can be useful in some places - especially if there are many people who do not read and write but often listen to the radio.

· Advertising on television is expensive and is often used by large businesses who want to reach many customers in a large area.

Figure

When you advertise, think about what customers would like to know. Customers want to know:

· what products or services you sell
· your prices and terms
· where they can buy your products
· why they should buy from your business. What is special or different about your business, your products or services.

SALES PROMOTION

Sales promotion is everything you do to make customers buy more when they have come to your business. You can do sales promotion in many different ways.

Displays

Display is the way you arrange your products. Display is important for all businesses, especially for shops and stores. Good display makes it easier for customers to see your products so they can choose and buy.

Keep your business:

· well organized
· well lit, clean and fresh-looking
· attractive, with your products well displayed.

On the opposite page are some ideas on how to display your goods to increase your sales:

More ideas for sales promotion

Let customers try new products

Let customers try or taste new products, to interest them in buying the new products.

Make special offers

Use special offers to sell more of your regular goods, seasonal goods or new goods. You can also use special offers for goods which have been selling slowly and goods which are slightly old or damaged.

Give demonstrations

Show customers how to use products that are technical or difficult to understand. When customers can see how something works and how well it works, they become more interested in buying.

Sell products that go together

To sell more, put products that go together next to each other. Torches and batteries go together. They are not useful on their own. Remind customers to buy them.

There are no rules for sales promotion, but remember:

· Be creative, use your own ideas and try something different.

· Keep customers interested. Change the type of sales promotion often and only use each for a short time.

· Do not use too many types of sales promotion at the same time. Customers may feel you are forcing them to buy.

Figure

PUBLICITY

Honey Bee is a successful bee-keeping business. A journalist wrote a story about the business in the local newspaper. Because of the story many people found out about their products and sales increased for Honey Bee. They got publicity.

Publicity is free promotion through an article in a newspaper or magazine which tells people about your products or services. The article promotes your business. Good publicity increases your sales.

Publicity works well because:

· people who do not read advertisements may read the article about your business
· people believe what they read in an article more than they believe advertisements.

It is not easy to get publicity for your business. You can write an interesting letter to a local newspaper, magazine or the radio and describe what your business does and how it serves the community. If they think they can make a good article about your business they might come and interview you.

Word of mouth - what people say about your business

There is another type of publicity which is free. It is probably the most common way new customers find out about your business. It is called word of mouth. Word of mouth means that people tell others what they think about you, your business and what you sell. The word travels from one person to another. Make sure it is a good word so it gives your business a good reputation.

Word of mouth can also be bad for your business. Bad words about your business travel very fast - almost like a fire. It takes a long time to build a good reputation again. So, always make sure that customers talk well about you, your employees and the products or services your business sells.

IMPROVING YOUR SKILLS AS A SALESPERSON

You have attracted customers to come to your business with good advertising and good sales promotion. But your product or service is not yet sold. How well you will sell now depends on you. Your skills as a salesperson can make the difference between success and failure.

How to be a successful salesperson

To improve your skills as a salesperson and increase your sales you need to:

· know your customers and their needs
· know how to treat your customers
· know your products and how to sell them.

Know your customers and their needs

Customers are different. For example:

· some customers can never make up their minds
· some customers are always in a hurry
· some customers never have enough money.

To be successful, try to understand and get to know every customer. First find out what the customer really needs by listening and asking questions. Then satisfy the customer’s needs by:

· giving advice
· offering suitable products or services.

Know how to treat your customers

Successful salespeople try to see things through the customer’s eyes. This means that you should try to think of yourself as a customer.

Treat your customers the way you like to be treated when you are a customer:

· Greet your customers. Call them by their names.

· If you are already serving a customer, greet new customers and tell them that you will soon help them.

· Be polite and friendly so that customers feel welcome and enjoy visiting your business.

· Do not talk too much. Listen carefully to what your customers say and ask questions to find out what they need.

· Be patient. Give the customers time to ask questions and decide if they want to buy.

· Always be honest and trustworthy. For example, tell your customers the good and bad points about a product or a service.

· Do not disagree with your customers if they decide they do not want a product. Allow them to say no.

· Never argue with a customer. Make your customers feel they are right.

· Thank your customers for coming to your business.

Know your products and how to sell them

To get respect and trust from your customers and to sell well, you need to know your products. Your customers may ask many questions about your products, or services. Be sure you know the answers.

Even if you know your products very well, you may still not sell much. The reason can be that you do not know how to show and explain your products to your customers. For example, if you are selling a radio and tell the customer that the radio has short and medium wave bands, earphones and a manufacturer’s guarantee, the customer might not understand these technical details.

To make it easier for customers, a skilled salesperson:

· first tells the customer what the product can do and how it can be useful
· then gives the technical information that is needed.

If you are selling a radio you can explain the details this way:

· “You can listen to all local programmes very clearly. You can also listen to many programmes in other countries because this radio has both short and medium wave bands.”

· “You can listen without disturbing others because this radio has earphones. When you use the earphones, only you can hear.”

· “If you have any problems with this radio in the first six months, we will repair it free of charge because the manufacturer gives a six-month guarantee.”

Review

Summary

Marketing is everything you do to satisfy the needs of your customers and make a profit by:

· providing the products or services they need
· setting prices that they are willing to pay
· getting your products or services to them
· informing and attracting them to buy your products or services.

Your customers are the people or other businesses, who want your products or services and are willing to pay for them.

Do market research to learn about your customers and competitors.

The first P of marketing is Product. Product means having the products or services your customers want.

Customers buy goods and services to satisfy different needs and wants. A successful business finds out what customers need and then provides the products or services to satisfy those needs.

Keep your eyes and ears open for ideas about new products or services.

The second P of marketing is Price. In marketing, price means:

· setting a price that your customers are willing to pay
· making sure the price is attractive and still gives you a high enough profit.

Before you set a price, you need to know:

· your costs
· how much customers are willing to pay
· your competitors’ prices
· how to make your prices more attractive to your customers, for example by using special offers and discounts.

The third P of marketing is Place. Place means:

· location - where your business is located, and
· distribution - how to get your products or services to your customers.

Most retailers and service operators need to be where it is convenient for their customers. Manufacturers need to have a good way of distributing their products to their customers.

Direct distribution is most useful for your business if you make fairly expensive, specialized products and have few customers who may want a service with the product you make.

Retail distribution and wholesale distribution are most useful if you make a large quantity of standard, low-priced goods and have many customers in a large area.

The fourth P of marketing is Promotion. Promotion means informing and attracting the customers to buy your products or services.

Do promotion, sell more and increase your profit by:

· advertising
· sales promotion
· publicity
· improving your skills as a salesperson.

Use advertising to make customers more interested in buying your products or services.

Use sales promotion to make customers buy more when they have come to your business.

Publicity is free promotion. For example, a good story about your business in a newspaper or on a radio gives you good publicity. Word of mouth means that people tell others what they think about you, your business and what you sell.

Improve your skills as a salesperson. To be a successful salesperson and increase your sales you need to:

· know your customers and their needs
· know how to treat your customers
· know your products and how to sell them.

What did you learn in this chapter?

Now that you have worked through this chapter, try these practical exercises. The exercises will remind you of what you have learned and help you to improve the marketing in your business.

Compare your answers with the Answers. If you find it difficult to work out an answer, read the relevant part of the manual again. The best way to learn is to finish an exercise before you look at the answers. Check the list of Useful Business Words.

Marketing at Beauty Hair Salon

Beauty Hair Salon is located in the middle of the business centre in a small town. Beauty Hair Salon have friendly, qualified employees and a good reputation. Customers come to Beauty Hair Salon for trimming, styling, washing, cutting and colouring.

Beauty Hair Salon have noticed that some women in the business centre have a perm which is a new fashionable hairstyle. They do not do perms. Beauty Hair Salon want to increase their sales. So they do market research to find out about offering a new product, perms.

The following is the information Beauty Hair Salon found about perms in their market research.

Improve Your Business: Basics (ILO, 1999, 188 p.) BUYING (introduction...) Buying to sell Steps to follow when you buy Review Summary What did you learn in this chapter?

Improve Your Business: Basics (ILO, 1999, 188 p.)

BUYING

IN THIS CHAPTER YOU WILL LEARN HOW TO

Discover what kinds of products you need to buy for your business
Communicate with suppliers using appropriate documents and forms
Buy to your best advantage

Buying to sell

WHAT IS BUYING?

Businesses buy raw materials, goods and equipment to:

· make products to sell
· provide services
· resell.

Here are some examples:

IS BUYING IMPORTANT?

WHAT YOU BUY FOR YOUR BUSINESS

Businesses need to buy:

Equipment

Equipment is all the machinery, tools, workshop fittings, office furniture, etc., that your business needs. Equipment is expected to last for a long time and is often expensive. When you need to buy equipment, find out as much as you can about all the different types of equipment you could use. Your equipment will need repairs. Ask the supplier about spare parts and repairs before you buy any equipment.

Raw materials

Manufacturers need raw materials to make goods to sell. Raw materials are all the materials and parts that go into the products you make. Before you buy raw materials, find out what different materials you need and what quality of raw materials you need.

Finished goods

Wholesalers and retailers buy and sell finished goods made by manufacturers. Do market research and think carefully before you buy finished goods. Buy goods that your customers want.

BUY WELL TO IMPROVE YOUR BUSINESS

When you buy equipment, raw materials or finished goods:

Buy the right quality
Buy the quality of goods your customers want.

Buy the right quantity
Buy the quantities your business needs and your customers want - not too much or too little.

Buy at the right price
Buy at prices your business can afford and your customers are willing to pay. Make sure that the prices you pay give your business the profit it needs.

Buy at the right time
Buy when your customers and your business need the goods, materials or equipment - not too early or too late.

Steps to follow when you buy

There are certain steps to follow when you buy goods, materials, equipment or anything else your business needs. You can follow the same steps for any kind of business.

All eight steps are important. When you choose new suppliers, it is especially important to follow steps 1, 2, 3 and 4.

STEP 1. FIND OUT WHAT YOUR BUSINESS NEEDS

Make sure you know as much as possible about your customers - who they are and what they need and want. Here are some important questions to ask yourself before you decide what your business needs:

- Which different kinds of customers am I trying to sell to?
- What products or services do they want? Why do they want them?
- What prices are they willing to pay?
- How often and how much do they buy?
- Where and when do they usually buy?
- Who are my competitors and how good are they?

When you know what your market wants, you as a buyer can make better decisions about:

· what materials or equipment you need if you make goods to sell
· what goods you need if you resell finished goods
· what quantities you need
· what prices you are prepared to pay
· when you need the goods or materials.

STEP 2. GET INFORMATION ABOUT DIFFERENT SUPPLIERS

Find out which suppliers sell the goods, materials or equipment you need. There are many ways to find out:

· Ask the people who work with you, your business friends, your business trainer, or others. Also, find out from your competitors where they buy.

· Contact organizations that support small businesses, for example, the local Chamber of Commerce. They sometimes know about useful, reliable suppliers.

· Look in newspapers, magazines and trade journals. Sometimes there is a list of businesses at the back of the telephone book.

For each supplier, find out as much as possible about what goods, materials or equipment they offer, prices and discounts, credit, deliveries and so on. Try to find out from others how reliable each supplier is. For example:

· Does the supplier usually deliver on time?
· Does the supplier accept returned goods or materials?
· How responsible is the supplier for the quality of goods and materials?

Speak to other businesses about buying together. If other businesses need the same goods or materials, you can save money for your business and your customers by:

· getting discounts for bulk orders
· sharing transport costs.

By buying together, you can sometimes buy directly from the manufacturers and get even lower prices than from wholesalers.

STEP 3. CONTACT THE SUPPLIERS

When you have a list of good suppliers, find out what each supplier can offer you. To compare the different suppliers, find out what each one can offer by:

· visiting
· phoning
· writing to them.

If your business is far away from suppliers, it is sometimes better to write or phone instead of visiting them. Visiting suppliers takes time and costs money. Think of transport costs. Also, your business will suffer when you are not there.

It is best to get a reply to your questions in writing. Ask for a written quotation. A written quotation makes it easier if there will be any disagreements between you and your suppliers. You will learn more about quotations in step 4.

A neat written enquiry makes a good impression. So, write neatly by hand or, even better, have it typed. You can write your letter in a duplicate book so that you have a copy.

Figure

A written enquiry is useful for any kind of business, especially when you:

· deal with a new supplier
· buy expensive goods or services
· order seasonal goods such as seeds, umbrellas, blankets or jerseys.

Get as much information as possible about:

What different kinds of goods, materials or equipment each supplier can offer:

· Does the supplier have what you need, in the qualities and quantities you need?
· What is the smallest amount you can buy?

Prices and terms of payment:

· Do you need to pay cash or can you get credit?
· How much credit can you get?
· How soon do you need to pay?
· Can you get discounts if you buy large quantities or pay quickly?
· How much discount can you get?

Terms of delivery:

· Will the supplier deliver to your business?
· How soon after the order will they deliver?
· Do you pay for transport or is delivery free?

STEP 4. CHOOSE THE BEST SUPPLIERS FOR YOUR BUSINESS

The cheapest supplier is not always the best. Compare the quotations to find out exactly what the different suppliers can offer. A quotation is an answer to your enquiry. In a quotation, the supplier gives you detailed information about the goods, materials or equipment, prices, payment, delivery and any other conditions.

Decide what is most important for your business. It can, for example, be:

· credit
· regular and reliable deliveries
· low prices.

When you have decided what is most important for your business:

· carefully read the quotations you have received
· try to negotiate with the suppliers
· choose the best suppliers for your business.

Figure

These are the best two quotations The Hardware Store received after they sent out a number of enquiries. The Hardware Store is located in a small town far away from the suppliers, so free and fast delivery is most important. Good credit is also important.

The Hardware Store compared the quotations from Hardware Supplies and General Wholesalers:

STEP 5. MAKE THE ORDER

When you have decided which supplier to buy from, make your order by visiting, phoning, faxing or writing to the suppliers. It is always best to make your order in writing. A written order helps you to remember what you ordered and is proof that you made the order.

If the supplier does not have order forms, write your own. You can use a standard order book which you can find in many shops, or make a simple order form yourself. Send the original to the supplier, but remember to keep your copy.

If you have received a quotation, mention it in your order. You do not have to order everything on the quotation. Only order what you need. Think carefully about the quantities of the goods or materials you need:

· What is the smallest quantity you can order?
· How much is in each bulk package?
· Can you order less than one bulk package?

Figure

STEP 6. CHECK THE GOODS IMMEDIATELY

If you collect the goods or materials yourself, immediately check the type and quantity before you take the goods or materials away. If the goods or materials are delivered, the supplier usually sends a delivery note with the goods or materials. The delivery note lists details of the goods. The supplier wants you to sign the delivery note as proof that you have received the goods. Always check that you have received the right type and quantity before you sign the delivery note.

Here is the delivery note The Hardware Store received:

Figure

When you get your goods:

Immediately check the goods against the delivery note.

Before you sign the delivery note, make sure you have received:

· the goods you ordered
· the quantity you ordered
· the goods in good condition.

Figure

Some suppliers do not give you a delivery note. They give you an invoice. Then, check the goods against the invoice.

Then, check the delivery note or invoice against your order. Check that you received everything you ordered and you received your delivery on time.

Figure

If something is wrong, complain immediately. Do not sign the delivery note until the problem has been corrected:

· Contact the supplier or, even better, talk to the delivery person before he or she leaves.

· Write your complaint in a note to your supplier or write the complaint on the delivery note itself.

· Make sure the delivery person signs to agree that the complaint is correct. This makes it easier for you, and the supplier, to settle the matter.

Figure

STEP 7. CHECK THE INVOICE

An invoice lists details of what you have bought and tells you to pay. It says:

· how much you must pay
· when you must pay
· who you must pay
· how you must pay.

Some suppliers do not send a delivery note and an invoice. They send one document for both. The supplier can send an invoice:

· at the same time as you get the goods. This usually means that you have to pay immediately, in cash or by cheque

· after you get the goods. This means you do not have to pay straight away - you buy on credit.

Here is an invoice The Hardware Store received from General Wholesalers:

Figure

The invoice tells you when and how the supplier wants to be paid. This is often called terms of payment. For example:

· The invoice may be cash or COD which means Cash On Delivery. That means you must pay when the goods are handed over to you.

· If you get credit, the terms may say 30 days net. This means that you must pay not later than 30 days from the date written on the invoice.

Make sure that the invoice is correct. Compare the invoice with the delivery note. The list of goods must be the same on both. Make sure that:

· you have received everything you pay for
· the prices and totals are correct. For example, if the supplier promised you a discount, did you get the discount?

Figure

If you received a quotation, check the invoice against the quotation. Make sure that the supplier is charging the prices and terms they listed in the quotation.

If you think an invoice is not correct, find out what is wrong and contact the supplier immediately. Discuss the problem with the supplier and agree on the best way to solve it.

STEP 8. PAY

You pay for what you buy, whether you buy for cash or on credit. The terms of payment tell you when you must pay. There are different ways you can pay. You usually pay either in cash or by cheque.

Make sure you always get a receipt as proof that you have paid.

Keep all business documents, or copies of them, in good order. You can put them in one or more files where you can easily find them.

Figure

Review

Summary

Businesses buy raw materials, goods, and equipment to:

· make products to sell
· provide services
· resell.

To buy well, buy:

· the right quality
· the right quantity
· at the right price
· at the right time.

There are certain steps to follow when you buy goods, raw materials, equipment or other things your business needs:

1. Find out what your business needs
2. Get information about different suppliers
3. Contact the suppliers
4. Choose the best suppliers for your business
5. Make the order
6. Check the goods immediately
7. Check the invoice
8. Pay.

What did you learn in this chapter?

Now that you have worked through this chapter, try these practical exercises. The exercises will remind you of what you have learned and help you to improve the buying in your business.

Compare your answers with the Answers. If you find it difficult to work out an answer, read the relevant part of the manual again. The best way to learn is to finish an exercise before you look at the answers. Check the list of Useful Business Words.

Improve Your Business: Basics (ILO, 1999, 188 p.) STOCK CONTROL (introduction...) Control your stock Stock records Stock-taking Review Summary What did you learn in this chapter?

Improve Your Business: Basics (ILO, 1999, 188 p.)

STOCK CONTROL

IN THIS CHAPTER YOU WILL LEARN HOW TO

Control stock to improve your business
Arrange and display your stock to its best advantage
Decide whether stock records are important to your business
Keep stock records in a manner that improves your business

Control your stock

WHAT IS STOCK?

Stock means all the products your business has for sale. Stock is also all the raw materials or parts your business keeps and uses to make products or provide services. Different types of businesses have different types of stock. Here are some examples:

WHAT IS STOCK CONTROL?

Stock control means organizing the way you:

Receive your stock
Count and check the condition of goods or materials you receive against the invoice or delivery note.

Record your stock
Write down all goods or materials coming into or going out of your business.

Store your stock
Keep the right amount of stock in a safe and practical way.

Arrange your stock
Arrange your stock so that it attracts customers to buy and also makes it easy for you to see and count.

Check your stock
Check and count your stock often to make sure that it is in good condition and that no stock is missing.

Re-order your stock
Re-order the right stock, in the right quantity at the right time.

Figure

HOW CAN STOCK CONTROL IMPROVE YOUR BUSINESS?

Good stock control helps you to:

· keep the right goods and materials
· keep the right amount of stock - not too much or too little
· keep your stock in good condition
· prevent stock from being lost or stolen
· re-order stock at the right time.

GUIDELINES FOR BETTER STOCK CONTROL

Keep the right amount of stock

There can be many different reasons for running out of stock or keeping too much stock. For example:

· You do not know which goods sell well, and which sell badly. As a result, you may keep ordering the wrong goods or materials.

· You do not check your stock regularly, so you do not know how much stock you have. As a result, you may order too late or too early.

· Your stock is badly arranged, so it is difficult to see and count. As a result, you may order the wrong quantities and you may order at the wrong time.

Always think of what your customers want. Make sure that you do not run out of stock. But keep as little stock as possible. Little stock means less money tied up in stock and more money for your business to:

· spend on goods that customers want, or
· save and earn interest on.

Stock goods that sell quickly

· Buy or use stock that sells quickly.
· Stock that sells quickly means more sales and more money coming into your business.
· Avoid having stock that sells slowly. Stock that sells slowly ties up your business money.
· Offer stock that does not sell quickly at a discount if customers do not buy it at its regular price.

Arrange and display your stock well

· Arrange and display your goods neatly, so it is easy for customers to see and easy for you to check and count.

· Keep similar goods or materials in groups near each other.

· Keep small items such as screws and nails in small boxes - one box for each type and size.

· Goods and materials that are attractive to steal should be kept in safe places, for example, near the counter.

· Sell or use the stock you already have, for example perishables, before taking more from a new delivery. When stock is kept too long in your store it may become too old to sell or use. Your customers will complain and your business will lose money. You can put new stock at the back of the shelf so that the old stock at the front of the shelf sells first.

Figure

Check your stock regularly

· Always check that you have the amount of goods or raw materials you need.

· Check to find out if any stock is missing.

· Check for damaged stock or stock that is not in good condition. Try to sell such stock at a discount or use it up before it gets too old.

· Check your stock to find out when to order more and what quantities to order.

Keep stock records

· If your business has many goods or materials, use stock records.

· If your business sells fewer goods or materials, you may want to keep stock records only for expensive goods or materials.

· Use your stock records to see which goods sell well and which sell badly. This helps you to know what goods or materials to buy.

· Use your stock records to find out what stock to re-order, when to order and what quantities you need.

Stock records

Keeping stock records means writing down:

· all stock that comes into your business, and
· all stock that goes out of your business.

ARE STOCK RECORDS USEFUL FOR EVERY BUSINESS?

Stock records are most useful for businesses which:

· sell or use many different products or materials
· sell or use a lot of each product or material
· have products or materials that are expensive and attractive to steal.

You may find that it is not practical to keep stock records for all the goods or materials in your business. But it may be very useful to keep stock records for some of your goods or materials, for example, the ones that are expensive or attractive to steal.

Stock records are useful because they tell you:

· what goods or materials you have sold or used
· how much of the goods or materials you have sold or used
· when the goods or materials were sold or used
· how much of the goods or materials you have in stock.

Retailers and wholesalers keep stock records for the goods they buy to resell. Manufacturers keep stock records for raw materials. They also keep stock records for finished products.

You can use the information on the stock records to find out:

· what stock sells fast
· what stock to re-order
· when to re-order
· how much to re-order
· if any stock is missing.

USING STOCK RECORDS

When you make your own stock records:

· You can use cards, a hardcover book, an exercise book, loose pages in a file, or anything else that suits your business.

· You can use a separate card, or page, for each product or material.

· You can use a pencil for writing the cost per item, selling price and re-order level on your stock records. Then you can easily change the amounts when the costs, the prices or your re-order levels change.

Figure

Make sure that you keep your stock records correct and up to date. A record which is not up to date gives you incorrect information and you may make wrong decisions in your business.

How to keep stock records

To keep records of all stock, The General Store write down the information on stock cards. They use one card for each product they sell. Here is their stock card for Best Foods cooking oil in 750 ml bottles:

Figure

Stock comes into and goes out of a business in different ways. For example:

Re-order levels

The re-order level is the number of units you estimate you need until new stock is delivered. When your stock falls to the re-order level, it is time to order more.

To work out the re-order level, you need to know or estimate:

· how long it takes between ordering and receiving or collecting the new stock
· how much you expect to sell or use while you wait for the new stock
· how much extra stock you may need, for example if:

- you sell more goods or use more materials than you estimated
- the delivery is late
- the supplier is out of stock.

The General Store works out the re-order level for 750 ml bottles of cooking oil:

· The supplier normally delivers a week after they receive the order.

· The General Store normally sell 10 bottles per week.

· In case people buy more or the delivery is late, The General Store estimates that they need 5 extra bottles.

· The re-order level is: 10 + 5 = 15 bottles. ((1) - See figure below)

Figure

Make sure that you know and write down the re-order levels for the goods or materials that you sell or use a lot of. If your business keeps stock records, write the re-order levels on the stock records.

HOW STOCK RECORDS CAN IMPROVE YOUR BUSINESS

Stock records help you decide what goods to sell

Stock records show you how much to re-order

Stock records show you when to re-order

Last week, the supplier had no sugar. But The General Store did not run out of stock. When they work out their re-order levels, they include extra stock to cover for unexpected things such as late deliveries or higher sales than usual. The General Store write the re-order levels on the stock cards. Then they can easily and quickly check to see if it is time to re-order.

Stock records help you to find out if you are losing stock

The General Store write down all the stock in and stock out on their stock cards. The balance shows them how much stock there should be in stock. When they physically count their stock they find out how much stock there really is.

If there is a difference between the stock records and how many they count:

· there may be an error in filling in the stock records, or
· their business has a stock control problem. It is losing stock.

Stock-taking

WHAT IS STOCK-TAKING?

It is important to know exactly:

· what kind of stock you have
· how much stock you have
· what condition your stock is in
· how much your stock is worth.

To find out this information you must actually count, measure or weigh all your stock. Stock-taking is a system of physically counting and writing down all the stock in your business on a stock-taking list.

IS STOCK-TAKING IMPORTANT?

Stock-taking gives you a lot of useful information. For example, when you count your stock you will find out:

· if any stock is damaged or in bad condition
· which goods sell quickly and which sell slowly
· which materials and parts you use a lot of and which you use less of
· when to re-order, if you do not keep stock cards.

Figure

Stock-taking helps you to find out if stock is missing

When you compare the quantities on your stock cards with the quantities on your stock-taking list, you can find out:

· if any stock is missing, and
· how much stock is missing.

Stock-taking helps you to find out if there is a problem of missing stock. The reason for the problem can be error in filling in the stock cards, theft, or something else. The stock-taking list cannot explain why the quantity you really have is lower or higher than the balances on the stock cards. You must work that out yourself.

STEPS TO FOLLOW FOR STOCK-TAKING

Step 1. Prepare your stock-taking list

Make your stock-taking list before you do stock-taking. You can use loose sheets of paper, an exercise book or anything else that suits your business. At the bottom of this page, you can see part of a stock-taking list.

Figure

Step 2. Count the stock and write down the quantities on the stock-taking list

When two people do the stock-taking together, one person calls out the name of the product or material and the amount counted. The other person repeats the name and the amount and writes the information on the stock-taking list. This is a good way to avoid mistakes.

For each product, write down the details and the quantity you count on the stock-taking list. Make sure that you do not forget to count any stock, for example, in the storeroom or other places.

Figure

Step 3. Copy information from your stock cards to your stock-taking list

The balance on the stock card for cooking oil, 750 ml, shows that there should be 15 bottles. Copy the quantity from the stock card, 15 bottles, onto the stock-taking list.

Figure

Make sure that your stock cards are up to date before you copy the quantities onto your stock-taking list. Remember that a stock card which is not up to date gives you incorrect information and you may make wrong decisions in your business.

Step 4. Compare your stock cards with the stock-taking list

Compare the stock-taking list (how much stock you really have) with the balance on the stock cards (how much stock you should have) to get the difference (how much stock is missing). The General Store compare their amounts of Best Foods cooking oil, 750 ml:

Figure

Stock-taking helps you to find out if there is a problem of missing stock. But the stock-taking list does not explain why the real quantity is higher or lower than the balance on your stock card. You must find out the reasons yourself.

Maybe there are problems with your stock cards. For example:

· Did you forget to write down some new stock you bought?
· Did you forget to write down some items that you sold or used?
· Did you remember to write down damaged or broken stock that you could not sell or use?
· Have you made mistakes in your calculations?

Maybe there are problems with your stock-taking. For example:

· Did you forget to count some stock?
· Did you count correctly?
· Have you made mistakes in your calculations?

Maybe there are problems with theft, for example by your customers, your employees or other people who deal with your business.

Missing stock usually means that there are other, more serious problems in the way you look after and organize your stock. Use the information from your stock-taking to improve the stock control in your business.

Step 5. Write the correct quantities on your stock cards

The stock-taking list shows the correct quantities of stock. It tells how much stock you really have:

Figure

But the stock cards must also be correct:

Step 6. Write the cost per item for each product on the stock-taking list

The cost per item for a product is the price you paid your supplier for one item of the product. Write the cost per item for each product on the stock-taking list. Make sure that you write the latest price your supplier charged you for a product.

Step 7. Calculate the total value in stock of each product and write it on the stock-taking list

Multiply the quantity from the stock-taking with the cost per item to get the total value. The General Store calculate the total value of their stock of Best Foods cooking oil, 750 ml, like this:

Figure

When you add up the total value for each product you get the total value for your whole stock.

USE YOUR STOCK-TAKING TO IMPROVE YOUR BUSINESS

The information you get from your stock-taking can help you to improve your business. Look at problems you find when you do stock-taking and think carefully about how you can solve each problem. Here are some questions to help you think about and improve each part of the stock control in your business.

· Receiving your stock: Do you immediately count and check the condition of new stock against the invoice or delivery note?

· Recording your stock: Do you write down every item that comes into or goes out of your business? Do you keep and use stock records?

· Storing your stock: Do you keep all your stock in a safe and practical way? Do you prevent your stock from being damaged or spoilt by keeping the right amount in the right place?

· Arranging your stock: Do you arrange your stock in a way that attracts customers to buy and also makes it easy for you to see and count?

· Checking your stock: How often do you check and count your stock to make sure that it is in good condition and that no stock is missing?

· Re-ordering your stock: Do you have a system for re-ordering the right stock in the right quantity at the right time?

HOW OFTEN SHOULD YOU DO STOCK-TAKING?

How often your business should do stock-taking depends on many things, for example:

· if you keep stock cards or not
· what quantities of stock you keep
· how many different goods or materials you keep and how much they cost
· how quickly you sell or use your stock
· how good your security is.

Decide what is best for your business.

Review

Summary

Stock means all the products your business has for sale. Stock is also all the raw materials or parts your business keeps to make products or provide services.

Stock control means organizing the way you:

· receive your stock
· record your stock
· store your stock
· arrange your stock
· check your stock
· re-order your stock.

Some useful guidelines for better stock control are:

· keep the right amount of stock
· stock goods that sell quickly
· arrange and display your stock well
· check your stock regularly
· keep stock records.

To keep stock records means writing down:

· all stock that comes into your business, and
· all stock that goes out of your business.

You can use the information on the stock records to find out:

· what stock sells fast
· what stock to re-order
· when to re-order.
· how much to re-order
· if any stock is missing

Work out the re-order level for your goods. The re-order level is the number of units you estimate that you need until you get new stock. When your stock falls to the re-order level, it is time to order more.

Stock-taking is a system of physically counting and writing down all the stock in your business on a stock-taking list.

Stock-taking helps you to find out:

· if stock is missing and how much is missing
· if any stock is damaged or in bad condition
· which goods sell quickly and which sell slowly
· which materials and parts you use a lot of and which you use less of
· when to re-order, if you do not keep stock cards.

Follow these steps to do stock-taking:

1. Prepare your stock-taking list
2. Count the stock and write down the quantities on the stock-taking list
3. Copy information from your stock cards to your stock-taking list
4. Compare your stock cards with the stock-taking list
5. Write the correct quantities on your stock cards
6. Write the cost per item for each product on the stock-taking list
7. Calculate the total value in stock of each product and write it on the stock-taking list.

What did you learn in this chapter?

Now that you have worked through this chapter, try these practical exercises. The exercises will remind you of what you have learned and help you to improve the stock control in your business.

Compare your answers with the Answers. If you find it difficult to work out an answer, read the relevant part of the manual again. The best way to learn is to finish an exercise before you look at the answers. Check the list of Useful Business Words.

TASTY BREAD STOCK CARDS

TASTY BREAD STOCK-TAKING LIST

Improve Your Business: Basics (ILO, 1999, 188 p.) COSTING (introduction...) Know your costs Costing for a manufacturer or service operator Costing for a retailer or wholesaler Review Summary What did you learn in this chapter?

Improve Your Business: Basics (ILO, 1999, 188 p.)

COSTING

IN THIS CHAPTER YOU WILL LEARN

Determine what it costs to run your business
Use costing to improve your business
Differentiate between direct and indirect costs
Differentiate between material and labour costs
Differentiate between costs for a manufacturer or service operator and those for a retailer or wholesaler

Know your costs

WHAT ARE COSTS?

Every business has costs. Costs are all the money your business spends to make and sell your products or services. Here are some examples of costs:

· Salaries and wages to the employees are costs to the business.
· Electricity for the lights, machines and other equipment is a cost to the business.
· Raw materials bought to make into products are a cost to the business.

If you are a service operator, a retailer or a wholesaler, you may not have exactly the same costs as a manufacturer. But most businesses have costs for materials, labour, electricity, rent, transport, and so on.

WHAT IS COSTING?

Costing is the way you calculate the total costs of making and selling a product or providing a service. Many businesses do not know all their costs and therefore cannot do their costing properly.

HOW CAN COSTING IMPROVE YOUR BUSINESS?

Costing helps you to set prices

When you know your total costs, you can set prices which will give your business a profit.

Costing helps you to reduce and control your costs

When you know all your costs, you can work out better and cheaper ways to make and sell your products or services.

Costing helps you to make better decisions about your business

When you know the total costs for each type of product or service, you can make better decisions about which products or services to sell so that your business makes the highest profit.

Costing helps you to plan for the future

When you know all your costs, you can make plans for your business. For example, you need to know all your costs before you can make a Sales and Costs Plan or a Cash Flow Plan.

DIFFERENT TYPES OF COSTS

Before you can do costing, it is necessary to understand the different types of costs a business has. All businesses have two types of costs:

· direct costs, and
· indirect costs.

You must understand the different types of costs to be able to calculate the total costs and do the costing for each product or service your business makes or sells.

Direct costs

For a manufacturer or service operator, direct costs are all costs that can be directly related to:

· the products or services you make or sell, or
· the production of those products or services.

For a retailer or wholesaler, direct costs are the costs for buying goods to resell.

To be counted as direct costs, the costs must also be:

· easy to calculate
· big enough to add a considerable amount to the total direct costs.

For example, Reliable Tailors make protective coats. Fabric and buttons are direct costs for making a protective coat because:

· they become part of the coat
· the amounts of fabric and buttons for each coat are easy to calculate
· the costs of fabric and buttons are big enough to add a considerable amount to the total direct costs of a coat.

Reliable Tailors have employees working full time sewing protective coats. Those employees’ wages are direct costs because:

· their work is directly related to the production of coats
· the time they spend making coats is easy to calculate
· their wages are big enough to add a considerable amount to the total direct costs of a coat.

Reliable Tailors have to pay for two things that are directly related to the production of protective coats:

· materials
· labour.

So you can see there are two different types of direct costs:

· direct material costs
· direct labour costs.

Figure

Direct material costs

Direct material costs are what your business spends on materials that become part of, or are directly related to, the products or services you make or sell.

To be counted as a direct material cost:

· the amount of material must be easy to calculate
· the cost of the material must be big enough to add a considerable amount to the total direct material costs.

Here are examples of direct material costs for different businesses:

· At The Metalworks Company, the sheets of metal, hinges and bolts become part of the door frames. The amount of each material for one door frame is easy to calculate. The cost of each material is big enough to add a considerable amount to the total direct material costs of the business. So the costs of sheet metal, hinges and bolts are direct material costs for the business.

· Reader’s Bookshop does not make products. They buy stationery, books and other goods to resell. For a retailer or wholesaler, the costs of buying goods to resell are direct material costs.

Direct labour costs

Direct labour costs are all the money your business spends on wages, salaries and benefits for the employees who work in the production of your products or services. Retailers and wholesalers, who do not make products or provide services, do not have direct labour costs.

To be counted as a direct labour cost:

· the time spent on making the product must be easy to calculate
· the cost of the direct labour must be big enough to add a considerable amount to the total direct labour costs.

Here are examples of direct labour costs for different businesses:

· At The Metalworks Company, the employees’ work is production of metal products. The time spent making each product is easy to calculate. The wages paid for the work are big enough to add a considerable amount to the total direct labour costs. So the wages the business pays to the employees are direct labour costs for the business.

· Reader’s Bookshop does not have any employees working directly in making products. So they do not have any direct labour costs.

Indirect costs

Businesses do not only have direct costs. All businesses also have costs for running the business, for example rent, electricity, transport, licences, repairs and maintenance. These types of costs are called indirect costs.

Indirect costs are all other costs, except direct costs, that you have for running your business. Indirect costs are normally not directly related to one particular product or service. They are costs for the whole business.

Here are some examples of indirect costs:

Costs for wages of employees or owners who do not work directly in the production of goods or services are indirect costs. For example, wages of sales staff, messengers, cleaners and security guards are indirect costs. For retailers and wholesalers, all salaries and wages are indirect costs. These costs are called indirect labour costs.

Some costs that would normally be calculated as direct costs can become indirect costs. Here is an example:

To make coats, Reliable Tailors use thread. But they have decided that thread is an indirect cost and not a direct cost because:

· the amount of thread they use to make one protective coat is very small and difficult to calculate

· the cost of the small amount of thread they use to make one coat is not big enough to add a considerable amount to the total direct material costs.

You can see that there are different types of costs that make up the total costs of a product or service.

Costing for a manufacturer or service operator

To explain how a manufacturer or service operator does costing we use Reliable Tailors as an example. Reliable Tailors make different types of garments such as protective coats and overalls. To help them calculate all the costs for one product they use a Product Costing Form. The Product Costing Form follows 4 steps:

The next page shows a Product Costing Form. Reliable Tailors also use a Labour Costs Form to help them with their calculations.

They use the Labour Costs Form in Step 2.

Figure

STEP 1. CALCULATE DIRECT MATERIAL COSTS

Calculate the costs of all materials:

· that become part of, or are directly related to, the product or service
· that are easy to calculate and have a big enough cost to be counted.

You can see how Reliable Tailors use the Product Costing Form to calculate the direct material costs for one protective coat to be 30.40 NU.

Here are some notes to help you complete Step 1 of the Product Costing Form to work out the direct material costs per item:

Column 1. Raw material

In column 1 on the Product Costing Form, write down the different raw materials that become part of the product or service. Only include materials that are easy to calculate and have a big enough cost to be counted.

Reliable Tailors write down fabric and buttons. They also use thread but:

· it is difficult to calculate how much thread they need for one coat
· the thread needed for one coat costs very little.

So Reliable Tailors have decided that thread is not a direct material cost for making protective coats. At Reliable Tailors, thread for making coats is counted as an indirect cost. You can see how Reliable Tailors include thread in their indirect costs.

Column 2. Buying costs

In column 2 on the Product Costing Form, write down the cost of buying one unit of each raw material.

Column 3. Quantity per item

In column 3 on the Product Costing Form, write down how much you need of each raw material to make one item. Remember to include wastage.

Most businesses have some wastage. For example:

· Reliable Tailors have small pieces of fabric left over.
· A carpenter has off-cuts of wood wasted.
· A tinsmith gets bits of metal that are too small to use.

Wastage is a cost to your business because you have paid for the raw materials that are wasted. Work out how much waste you normally have for one item. Add this amount to the quantity of material you need to make the item.

Column 4. Costs per item

In column 4 on the Product Costing Form, write down the cost of each material needed to make one item. To calculate this cost, multiply the buying costs (column 2) by the quantity needed for one item (column 3).

Total

When you have worked out the cost of each raw material needed to make one item, add up the amounts in column 4. This total gives you the total direct material costs for the item.

STEP 2. CALCULATE DIRECT LABOUR COSTS

Work out the costs of wages, salaries and benefits for the employees who work directly in the production of the product or service.

Every business needs information on all their labour costs. To help you calculate labour costs for your business, you can use a Labour Costs Form.

On the Labour Costs Form, you write information about each person working in your business, for example, working hours per month, wage per month and time in production per month.

You need this information to:

· calculate the direct labour costs per hour (on the Labour Costs Form)
· calculate the direct labour costs per item (on the Product Costing Form).

Reliable Tailors have nine employees. Most of them work in production, but some of them are not directly involved in the production. That is important to know when you calculate the direct labour costs.

First, Reliable Tailors fill in the Labour Costs Form. Then they use the information to work out the direct labour costs for one protective coat on the Product Costing Form.

Here is the Labour Costs Form for Reliable Tailors:

Figure

Column 1. Employee

In column 1 on the Labour Costs Form, write down the name of each person working in the business. You can also write down the type of work they do.

If you are the owner, you must remember to include yourself. For example, at Reliable Tailors, Mr Anderson and Mrs Hall are the owners:

· Mr Anderson does supervision and sewing.
· Mrs Hall does sales and administration.

Column 2. Total working hours per month

In column 2 on the Labour Costs Form, write down the number of hours each person works in the business per month.

At Reliable Tailors, most employees work 160 hours per month.

But two employees do not work 160 hours per month:

· Miss Peters assists with record-keeping. She only works 40 hours per month.
· Mr Hunter is very skilled at sewing. He works extra hours when there is a lot of work. With overtime, Mr Hunter usually works 180 hours per month.

Column 3. Total monthly pay

In column 3 on the Labour Costs Form, write down how much each person gets paid per month.

Owner’s salary is also part of the labour costs for a business. It is important that the owner writes down how much the business pays him or her per month. For example, Mr Anderson and Mrs Hall pay themselves 1000 NU each per month.

The Labour Costs Form is divided into two parts:

· Direct labour costs (columns 4 and 5)
· Indirect labour costs (columns 6 and 7)

Direct labour costs

Columns 4 and 5 on the Labour Costs Form give you information about the costs for employees who work directly in the production of your products or services. Their wages, salaries and benefits are direct labour costs.

Column 4. Hours in production per month

In column 4 on the Labour Costs Form, write down how many hours each person works in production per month.

At Reliable Tailors, Mr Wilson, Mr Hunter, Mrs Jones, Mrs Preston and Miss Turner spend all their time working in production. So, for each of them, the number of hours in column 4 is the same as the total working hours per month in column 2.

Mrs Hall, Mr Smith and Miss Peters do not work in production. They do other kinds of work. Their salaries and wages are indirect labour costs (see column 6).

Some people work in production and also do other jobs that are not directly related to the production of a particular product or service. For example, look at the information on the Labour Costs Form for Mr Anderson:

· Half of his time, 80 hours per month, Mr Anderson does sewing. He works directly in production. His salary for this work is a direct labour cost.

· The other half of his time, 80 hours per month, Mr Anderson supervises the production of all the garments that Reliable Tailors make. His salary for this work is an indirect labour cost (see column 6).

Column 5. Pay for time in production

In column 5 on the Labour Costs Form, write down how much of each person’s monthly pay is for time spent working in production. If a person works full-time in production, the whole wage is a direct labour cost. If a person works part-time in production, divide the wage into direct labour costs and indirect costs.

For example at Reliable Tailors:

· Mr Anderson’s total salary is 1000 NU.
· He spends half his time in production and half his time supervising.
· Half his salary, 500 NU, is for time spent in production and is a direct labour cost. So 500 NU is written down as pay for time in production in column 5 on the Labour Costs Form.

Indirect labour costs

Columns 6 and 7 on the Labour Costs Form give you information about the costs for employees who do not work directly in production. Their wages, salaries and benefits are indirect labour costs.

Column 6. Hours not in production per month

In column 6 on the Labour Costs Form, write down how many hours each employee in the business does work that is not directly in the production of a particular product or service.

At Reliable Tailors:

· Mr Anderson works 80 hours supervising.
· Mrs Hall works full-time in sales and administration.
· Mr Smith works full-time as messenger and cleaner.
· Miss Peters works 40 hours assisting with record-keeping.

Column 7. Pay for time not in production

In column 7 on the Labour Costs Form, write down how much of each person’s monthly pay is for time spent doing work that is not directly related to the production of a particular product or service.

For example, at Reliable Tailors:

· Half of Mr Anderson’s salary, 500 NU, is for supervision which is not directly related to the production of only one particular product.

· The full wage for Mr Smith, the messenger, is for work that is not in production.

Direct labour costs per hour

Use the bottom part of the Labour Costs Form to calculate the direct labour costs per hour for your business.

To calculate the direct labour costs per hour:

· divide the total pay for time in production per month (the total of column 5) by the total number of hours worked in production per month (the total of column 4).

At Reliable Tailors, the direct labour costs per hour are 3.30 NU. Look to see how Reliable Tailors do their calculation.

Calculate direct labour costs per item

To do costing you must know the time it takes to make each item and the direct labour costs per hour. Then you can use the Product Costing Form to work out the direct labour costs per item.

Reliable Tailors have calculated that their direct labour costs per hour are 3.30 NU. Now they need to work out how long it takes to make one protective coat. Then they can calculate the direct labour costs for one protective coat.

In Step 2 of the Product Costing Form write down:

· the different activities or types of work your employees do to make the item
· how long each activity takes.

You can see how Reliable Tailors have estimated how long it takes to make one protective coat.

Reliable Tailors estimate that it takes one and a half work-hours to make one protective coat. A work-hour is not always the same as an hour on the clock. It is important to know the difference when you do costing.

The number of work-hours is the total amount of time you need to make one item or provide one service. The time each person works on the item or service is added up to give the total time.

It takes 1.5 hours to complete one coat from cutting to packing. But at Reliable Tailors, each employee only does one activity on each coat. So they can make many coats in 1.5 hours. But it still takes 1.5 work-hours to do all the activities on one coat.

When you know how many work-hours it takes to make one item, you can work out the direct labour costs per item. Do the calculation on the Product Costing Form. To calculate the direct labour costs per item:

· multiply the total work-hours it takes to make one item by the direct labour costs per hour for your business.

Reliable Tailors know that:

· it takes 1.5 total work-hours to make one coat
· the direct labour costs for one hour are 3.30 NU.

So, by multiplying, they calculate that the direct labour costs for one protective coat are 4.95 NU. You can see how Reliable Tailors calculate the direct labour costs for one coat.

STEP 3. CALCULATE INDIRECT COSTS

Reliable Tailors have completed Steps 1 and 2 of their costing. They have filled in part of their Product Costing Form. Now Reliable Tailors know that the direct material costs for one coat are 30.40 NU, and that the direct labour costs for one coat are 4.95 NU.

Indirect costs are all other costs, except direct costs, that you have for running your business, for example, rent and electricity.

Here is how Reliable Tailors calculate their indirect costs:

Costs that you do not pay every month

You need to calculate indirect costs per month. Your business may have some indirect costs that you do not pay every month, for example, insurance, licences, tools and stationery. For those costs, divide the cost by the number of months the item is used. For example, Reliable Tailors buy stationery such as receipt books every 3 months. They pay about 60 NU each time. So they calculate that their cost per month for stationery is 20 NU:

Explanations of some of the indirect costs for Reliable Tailors

A. Transport

In the amount for transport, Reliable Tailors include all transport that their business has to pay for. For example, when they:

· collect materials
· deliver finished garments to customers.

Transport is usually an indirect cost because it is difficult to calculate how much the transport costs are for one item. For example, transport costs for one protective coat are difficult to work out because:

· when Reliable Tailors get a delivery of fabric for coats they often get fabrics for other garments in the same delivery

· when Mrs Hall uses transport to meet customers, she may sell overalls and other garments, not only protective coats.

B. Indirect labour

Reliable Tailors use information from their Labour Costs Form to get the amount they spend on indirect labour per month. They copy the total amount from column 7 on their Labour Costs Form.

C. Thread, pins, etc.

At Reliable Tailors, thread is an indirect cost because:

· the small amount of thread needed for each garment is difficult to calculate
· the cost of thread for each garment is very small.

D. Scissors, needles, etc.

In this amount, Reliable Tailors include the cost of scissors, measuring tapes and other less expensive equipment or tools which are needed for the business. All costs for less expensive tools and other equipment must be included in the indirect costs.

E. Depreciation

If equipment has a high value and lasts for a long time, you do not write down the cost of buying it. Instead you calculate how much value the equipment will lose every month you use it. This is called depreciation.

Sometimes Reliable Tailors buy expensive equipment like sewing machines. The following section explains depreciation and shows you how Reliable Tailors calculate depreciation in their business.

Depreciation

Depreciation is the loss in value of equipment and is a cost to your business. The total cost of buying the equipment is divided into the number of years you expect to use it.

For some businesses, in particular manufacturers like Reliable Tailors, costs for depreciation are high. So, it is important to include depreciation in the indirect costs for your business.

Find out if your business has equipment for which you should calculate depreciation

In general, only calculate depreciation for equipment which:

· has a high value, and
· lasts for a long time.

Reliable Tailors calculate depreciation for their sewing machines. They do not calculate depreciation for scissors and other less expensive equipment.

Figure

Estimate for how long you can use the equipment

To estimate how long you expect to use your equipment, you can:

· use your own experience
· ask suppliers
· ask other businesses using the same or similar equipment.

Reliable Tailors have 4 sewing machines. They estimate that they can use 3 sewing machines for 5 years. They bought the fourth sewing machine second-hand and they estimate that they will use it for only 3 years.

Calculate the depreciation

For example, Reliable Tailors paid 6000 NU for sewing machine 1 when they bought it in 1995. They expect to use it for 5 years.

First, they calculate the depreciation per year:

Then, they divide the amount per year into months:

Reliable Tailors calculate the depreciation for the other 3 machines in the same way.

If you have more than one machine, or other equipment, add up the depreciation per month for each piece of equipment to get the total amount you need to include in your monthly indirect costs.

Reliable Tailors add up the amounts for depreciation per month for all 4 sewing machines:

Reliable Tailors include the total amount for depreciation per month in their indirect costs.

Calculate indirect costs per item

The total indirect costs for a business must be divided and shared by each product or service the business makes or sells. The indirect costs for one item depend on how long it takes to make that item. The longer it takes to make, the higher the indirect costs for that item.

Normally, the total indirect costs for Reliable Tailors are 4770 NU per month. Reliable Tailors must add a part of the 4770 NU to the costs of each item the business makes.

To calculate the indirect costs for one item use Step 3 of the Product Costing Form. First calculate the indirect costs per hour for all items your business makes.

To work out the indirect costs per hour for your business:

· divide the total indirect costs per month by the total hours in production per month (from the Labour Costs Form).

Then:

· multiply the total time per item (from Step 2 of the Product Costing Form) by the indirect costs per hour.

You can see how Reliable Tailors do their calculations of the indirect costs for one protective coat on the Product Costing Form. The indirect costs for a coat are 7.95 NU.

STEP 4. ADD UP TOTAL COSTS

Reliable Tailors have completed Steps 1, 2 and 3 of costing a protective coat. They now have all the amounts they need to work out the total costs of a coat. To do Step 4, they add up the amounts on the Product Costing Form:

Now Reliable Tailors know the total costs of a coat. See the completed Product Costing Form.

They follow the same 4 steps for costing all other products they make. They use a separate Product Costing Form for each product. If the costs are not the same, Reliable Tailors use a separate Product Costing Form for each quality or design.

Remember, you only need one Labour Costs Form for the whole business. Reliable Tailors can use the information from their Labour Costs Form for costing all their products.

Figure

Costing for a retailer or wholesaler

Retailers and wholesalers have the same types of costs and can normally do costing in the same way. Some costs for retailers and wholesalers are different from the costs manufacturers and service operators have:

Figure

Retailers and wholesalers:

· have direct material costs. Retailers do not make products but they need goods to sell. The costs of buying goods to resell are the direct material costs for a retailer or wholesaler.

· do not have direct labour costs. They buy and sell goods made by other businesses. They often have employees assisting in the store but they do not have any employees making products. So, for a retailer or wholesaler, all wages and salaries are indirect costs.

· have indirect costs such as rent and electricity. For a retailer or wholesaler, indirect costs are all the costs the business has except for the costs of buying goods to resell.

Retailers and wholesalers follow 3 steps to calculate the total costs for each product. They can use the Product Costing Form for the calculations.

To explain how a retailer or wholesaler does costing we use The General Store as an example.

STEP 1. CALCULATE DIRECT MATERIAL COSTS

Direct material costs for a retailer or wholesaler are the costs of buying goods to resell.

The General Store calculate the direct material costs per item for the different products their store sells. This is how they calculate the direct material costs for baked beans:

· The General Store pay 36.00 NU for a box of baked beans.
· There are 12 cans in a box.
· The direct material cost of one can of baked beans is 3.00 NU.

The General Store does not include any cost for transport. They count transport as an indirect cost for the whole business. In the Product Costing Form, The General Store write the name of the product. In column 1, they write how much they pay for one item.

STEP 2. CALCULATE INDIRECT COSTS

Indirect costs are all other costs that you have for running your business, for example, rent and electricity. For a retailer or wholesaler, indirect costs are all other costs, except costs for buying goods to resell.

The total indirect costs for a business must be divided and shared by each item the business sells. Normally, the total indirect costs for The General Store are 2000 NU per month. The General Store must add a part of the 2000 NU to the costs of each item their business sells.

Figure

The General Store wants to calculate the indirect costs for one can of baked beans. To do this, they must work out the indirect costs charge (%) for their business. Then they can calculate how much to add to the direct material costs for each can of baked beans to cover the total indirect costs.

The indirect costs charge is a percentage that you add to each item you sell to cover the total indirect costs.

The General Store do the calculations for the indirect costs charge on the top part of their Product Costing Form.

To calculate the indirect costs charge and the indirect costs per item for every product you sell, follow these steps:

1. Calculate total direct material costs per month
2. Calculate total indirect costs per month
3. Calculate the indirect costs charge
4. Calculate the indirect costs per item.

1. Calculate total direct material costs per month

First, calculate how much money your business normally spends each month to buy goods to resell.

The General Store have many regular suppliers. They buy some goods:

· many times a week, for example, bread
· once a week, for example, dry foods and groceries such as sugar, salt and margarine
· once a month, for example, clothes.

They add up the receipts for all the goods their business normally buys during a month.

Some months The General Store buy a lot and some months they only buy a little but normally they buy goods to resell for 10,000 NU per month.

The General Store write the amount for total direct material costs per month at the top of their Product Costing Form.

The General Store does not include any transport costs in the total direct material costs for buying goods. It is difficult to calculate the transport costs for each item. They cannot just divide the cost and add the same amount to each item in the delivery because:

· there can be hundreds of items in one delivery, sometimes more, sometimes less, but the cost for transport is often the same for each delivery

· in each delivery, some goods cost a lot and some cost less

· some items are big and some are small.

So, retailers and wholesalers should calculate their transport costs as indirect costs. Below, you can see how The General Store include transport costs as an indirect cost for their business.

2. Calculate total indirect costs per month

The General Store work out the total indirect costs for their business per month. Remember, for a retailer or wholesaler, indirect costs are all costs, except direct material costs, that you have for running your business.

The General Store list the indirect costs for the whole business. The list must include all the indirect costs per month for your business.

Here are the indirect costs for The General Store:

Different businesses have different indirect costs. Work out how much money your business normally spends for each indirect cost every month. Make sure that your list of indirect costs is complete.

Costs that you do not pay every month

Your business may have some indirect costs that you do not pay each month, for example, insurance, licence and stationery. For those costs, divide the cost by the number of months the item is used. For example, The General Store pay 60 NU per year for a licence to operate the business. The cost per month is 5 NU:

Explanations of some of the indirect costs for The General Store

A. Transport

The General Store add up all the transport costs that their business has per month. This includes transport costs for:

· visiting suppliers, for example, bus fares and taxis
· buying goods for the business
· delivering goods to customers
· delivery by suppliers.

B. Indirect labour

Retailers and wholesalers buy and sell goods. They do not make any products. They do not have any employees directly involved in the production of goods. So, retailers and wholesalers do not have any direct labour costs. All salaries, wages and benefits for employees and owners are indirect labour costs.

C. Depreciation

Your business should calculate depreciation on equipment that:

· has a high value, and
· lasts for a long time.

For example, The General Store buy a delivery bicycle for their business. The bicycle has a high value of 1200 NU. The General Store estimate that they will use it for 5 years. But the bicycle will lose value during the 5 years. The loss in value is called depreciation and is a cost to the business.

Figure

To work out how much the depreciation of the bicycle costs their business each year, The General Store divide the total cost of buying the bicycle by the number of years they expect to use it:

Then they divide 240 NU to work out the depreciation per month:

The General Store write the amount per month in their list of indirect costs.

The General Store write down all indirect costs per month on their list of indirect costs. They add them up to get the total indirect costs per month. They write the amount at the top of their Product Costing Form.

3. Calculate the indirect costs charge

To calculate the indirect costs charge, divide the total indirect costs per month by the total direct material costs per month and multiply by 100. See The General Store’s calculation.

The General Store work out that the indirect costs charge for their business is 20%. The 20% indirect costs charge means that The General Store must add 20% to the direct material costs of each can of baked beans.

4. Calculate indirect costs per item

The indirect costs charge tells you what percentage to add to the direct material costs of all the goods you sell so you can cover your total indirect costs. Now you have to calculate the amount to add to each item.

The indirect costs charge for The General Store is 20%. So The General Store must add 20% to the direct material costs of all the goods they sell.

Here is how they calculate the amount to add to each can of baked beans: