What Are Cost Of Business & How To Calculate Business?
How to calculate your business rate is one of the many questions that you would have to ask if you are planning to start a new business. Most probably, before starting any business, you have to do research and analysis about your market or niche. Once you have finished with your research and analysis, then you have to figure out your target market or niche. The next step would be to make a list of all the expenses that your new business will have in the short, medium or long term period. This list of expenses should not include your own expenses as they may vary depending on the nature of your business.
WHAT IS THE COST OF SALES?
Now that you have made up your list of the expenses that you have to incur for your business, it is time to come up with a computation of your cost of business. How to calculate business rate is not so difficult once you have completed making your list of all the expenses that your business has to incur. You just have to know how to apply some basic principles in economics. One thing that we need to keep in mind while calculating the cost of business is that the goods or service that you intend to provide to your customers should be valued according to the monetary value that they bring to the customers. Now that we are done with the computation of the cost of business, let us focus on the question, “How to calculate business rate?”
HOW TO CALCULATE THE COST OF SALES?
You can always consult your accountant to help you in calculating the cost of business. Now, when you have consulted your accountant, he would give you a complete price analysis that would help you calculate the cost of your business. In most cases, the accountant would also tell you the tax implications that you have to consider. In simple terms, you would be able to know the amount of tax that you would have to pay on your business transactions. This would further help you understand the magnitude of your business, its potential profitability as well as its growth prospects.
The cost of business is primarily determined by two things. One would be the direct expenditure and the other would be indirect expenditure. Direct expenditure refers to the money that you would have to pay for the operation of your business, including the salaries and wages of your employees. Indirect expenditure on the other hand refers to the money that you would have to invest in buying raw materials, building of raw material plants, rent on land, utilities, fixtures, etc. That is, the money that you would have to spend in order to expand your business. These two factors would determine the cost of business.
Now that you have understood the nature of cost of business & how to calculate business cost, let us checkout the various ways through which these two factors can be calculated. First of all, it is important to know about the working capital. Working capital is the money that a business needs in order to finance the various operations. For this purpose, the businesses use short term and long term assets as working capital. These assets might be in the form of cash reserves, current accounts receivable, assets under management, accounts payable, etc.
In case your business requires a lot of money, it is necessary to divide the cost of business by the amount of money required. The next step would be to look at the cost of purchases. This would again divide the cost of business by the total amount of money required. If the business deals with a lot of commodities, then the cost of production or cost of consumption is also necessary to be considered. While determining the cost of business, it is important to remember that the prices of commodities are always changing.
WHAT ELEMENTS INFLUENCE TO DETERMINE THE COST OF SALES?
One more important factor that should always be remembered while calculating the cost of business is to determine the effect of inflation on the business. It is not difficult to calculate the cost of business & how to reduce cost of business. All one has to do is keep an eye on the prices of various commodities in the market, and keep a tab on the price change for every six months or so. This will help you decide what to do about the cost of production.
However, if you are looking to expand your business, then the cost of purchase may not help you much. You need to look at the cost of employment. As you expand your business, the number of employees required would grow. In such a scenario, you need to look at the cost of purchasing new equipment, new office space, setting up new departments and many other things. All this will multiply the cost of business, and hence, will make it difficult for you to decide what to do about the cost of business. Hence, it is imperative that you keep these factors in mind, when you want to know what are the cost of business & how to calculate business.