Don't get caught off guard by unexpected cost hikes. Learn how to carefully track your direct and indirect costs and then adjust your pricing so that your business remains profitable and healthy.
By Mike Ukena
But, to be certain, I need to also see what is happening on the indirect side and there I find that Sept-Oct is flat. My pricing is fine…for now. When I move back in time to April/08, I see the biggest jump in direct costs and a slight increase in indirect. If I had not increased prices that month, I would have been upside down in a hurry.
Indirect costs are moderated by the fact that several of the biggest indirect costs do not fluctuate with the market. Rent and salaries are more predictable and since they are some of the larger contributors, they moderate indirect costs. But remember, if you only increase prices based on changes in your direct costs, you would see your gross profits go down even when you raise prices.
The volatility of the current economy makes it imperative to stay on top of your costs. It is also a good idea to make sure your customers understand the issues you are facing. A smart customer will understand the pressures you are facing. They certainly have to be facing the same sorts of problems in their own business. If someone in business does not understand why costs are rising, that person is not playing in the real world.
In fact, this may be a great opportunity to see what your customers are really like—and whether or not they are worth having—in the long run. If a given customer is not agreeable to your need to make money, then they really are not much of a customer. Sure, they may bring your company a nice fat receivable every month, but do they make your company money?
Our industry seems to be plagued by the bad customer. The customer who can always get a better price down the street and even when you do get the order, getting paid is another story altogether. Working for a loss is not working, it is crazy. We lose enough companies in this business. Do not be the next casualty just because you were afraid to let go of a customer who was not willing to pay a fair price.
Did you enjoy this article? Click here to subscribe to the magazine.