Heard the joke about the owner who says he loses ten cents on every sale? “How do you stay in business?” he is asked. “Volume.”

All costs are the result of a decision. Small businesses succeed because they give proper focus to knowing and managing costs.

Years ago I worked for a company whose owner, Don, was quite wealthy. I admired Don’s stable of exotic cars and enjoyed my first ride in a new Rolls Royce—his. How did this journey from rags to riches start? Don produced and sold unique, but simple metal artwork out of his garage. His distinctive gift was the ability to create artwork that could be mass-produced with a consistent gross profit margin.

“Know thy costs!” was Don’s mantra. Don’s large office was littered with beautiful pieces that never made the grade. Why? Even though he tinkered endlessly through 16-hour days, the cost of production could never be brought in line with his formula. Sometimes it was a matter of pennies.

During it’s heyday, Don’s company had 300 employees cranking out thousands and thousands of pieces in assembly lines. Costs were tracked, managed carefully and profits accumulated consistently—even for the three small butterflies that started it all.

Don labored to know his costs—even before he committed a dime.

I remain surprised at how many owners seem indifferent about how costs behave at their company—direct, indirect, overhead, fixed, variable, semi-variable. Ignorance of costs is not bliss.

Remember the old Jay Leno Doritos commercials? Jay in a leather coat astride his motorcycle saying, “Crunch all you want, we’ll make more.” By failing to study their financial reports, too many owners appear to think, “Spend all you want, we’ll sell more.”

Costs are completely controllable. [Insert debate about government confiscations—perhaps not controllable, but certainly knowable.] All costs are the result of a decision. Even fixed costs, such as the monthly rent payment, happen because of a commitment. Revenues, on the other hand, are subject to the vagaries of the marketplace.

Small businesses succeed because they give proper focus to knowing and managing costs.

A caveat: All things in moderation—including moderation. A growing business will not cut it’s way to success. Know costs so you can build appropriate pricing structures. Count costs so you can be efficient. Hold people accountable to hit projections and budgets. But do not fixate to the point you micro-manage, over-control, stifle people, and lose sight of the forest.

McNeely & McNeely CPA Newsletter

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