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Home » Finances

How well do you know your business?

How well do you know your business_

 

How Well Do You Know Your Business?

Here’s a question for you: as a business owner, how well do you know your business? In this post we look at the importance of understanding the nuts and bolts of your business.

I’m a big fan of the website Tripadvisor. The website and it’s community of reviewers, has saved me from booking a hotel in the “wrong” part of town, helped me organise a private tour of Sydney’s northern beaches for my wife’s birthday and discover a fantastic cafe in Auckland.

Now Tripadvisor has had its fair share of negative reviews itself, with claims that it contains fake reviews, in attempts by businesses to game the system,  but my experience are 100% positive.

Newsworthy reviews

When you read the reviews on Tripadvisor, every now and then you come across a review which is beyond interesting, it’s newsworthy.

One such review (before it was taken down by Tripadvisor) was by Hannah C. from North Yorkshire, who visited Bennett’s Cafe and Bistro in York, UK. 

According to the review she had a terrible time. “Overpriced and very rude staff” was the title of her review.

But that’s not what caught my attention, or the attention of the dozens of news outlets sharing the review before it was taken down by Tripadvisor.

It’s the response from the owner.

Essentially the lady complained about being charged £2 ($2.85) for a cup of hot water with a slice of lemon.

But instead of apologising, the owner went on to give the lady a lesson in economics of the catering industry:

He described the work that the waiter had done in getting a cup and saucer, going to the kitchen, opening the fridge, taking out a lemon, cutting off a slice etc, serving the drink, preparing the bill and clearing the table after the lady left.

He then went onto explain the costs of running his business for each hour of trading. The cost of staff and how much it had cost to prepare a cup of hot water with a slice of lemon.

Understanding the costs

“The costs of overheads for the business i.e. rent, business rates, electricity costs, bank charges etc. works out at £27.50 per hour of trading.”

On top of that he went on to explain was the cost of the staff; including holiday pay, national insurance and non productive time before and after closing.

“I pay my colleagues a living wage. The waiter who served you costs me £12.50 an hour”

The cost therefore, is around £40 an hour (£27.50+£12.50).  Or 67p per minute (£40/60 minutes).

So the 2-3 minutes the waiter spent serving the customer cost the owner of the cafe between £1.34 – £2.01.

Plus the cost of the slice of lemon (say 5p)

Don’t forget taxes

But that’s before you add on 20% VAT (Sale tax).

So, the cost to the owner of the cafe in providing the cup of hot water and lemon were between £1.67 and £2.47.

So in actual fact, the customer got a good deal paying only £2 for her cup of hot water and slice of lemon.

As the owner of the cafe concluded in his Tripadvisor response:

“it isn’t the cost of ingredients that drive the price, it’s the facilities and the overheads.” [Click to Tweet]

(You can read a copy of the Tripadvisor review here)

Do you do this – Do you understand your costs?

My question to you is this: do you do this?

Do you know how much it costs to run your business per hour or each day you trade?

and how much do you need to earn to cover your costs?

In case you don’t know, I’ve prepared a handy little calculator you might want to try:

 

Click Here to Download Overhead Calculator
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