YOUR BUSINESS SOUNDTRACK
I’ve never been a die-hard music fan…not that I don’t like music – I do! For me, though, music isn’t the focus of an event, it’s the background. It’s the soundtrack to the day or night. The right music makes it; the wrong music can ruin it…or at least give it a VERY different vibe. Case in point [click to listen!!]:
Snape isn’t as intimidating when he’s dropping mad beats like this, right?
So, while I’m not making a night-out of going to a concert, or spinning records, when I get together with friends, I want our background soundtrack to create the chill and cozy vibe I’m looking for.
When it comes to music, there are two pieces to a great song (well even a not-so-great song): the lyrics, and then the musicians and instruments that deliver the song.
The lyrics get written and they become the foundation of that song. No matter how many times the song is performed, that foundation stays the same. Performances, however – the musicians and instruments – that change from time to time. There’s the released version, a radio version, a live performance twist, or maybe even an acoustic version for those mellow nights that I like to have. The performers have the control to decide when to rock out, or when to chill out. The song is still the same, but the instruments you use and the way you play them dictate the vibe created.
When it comes to your business, like music, there are two parts to where your money goes – the foundational lyrics, and the adaptable performances.
THE FOUNDATIONAL LYRICS: FIXED COSTS
Fixed Costs are those set-in-stone lyrics. Also called OVERHEAD, these costs are like your favourite pair of jeans — reliable, unchanging, and always there for you. Think of them as the bills you pay, whether your business is rocking and rolling or taking a little siesta.
These costs are (almost) always the same. Whether you’re making $100 a month, or $100 a day, you need to come up with the money to pay these. These are things like:
Rent
Insurance premiums
Phone and utility bills
Salaries
Subscription costs
When making sales and setting your prices, you’re always needing to ensure you can cover your overhead…after you’ve paid your variable costs, of course.
THE ROCK STAR PERFORMANCE: VARIABLE COSTS
Whether you’re mellowing out to an acoustic remix or living your best life on the dance floor to a house remix, the choice is yours to decide what speed you want to move to.
In our business, we don’t always get to decide what speed we’re going to move. We try our best to compel our customers to give our sales some gas – and sometimes it works, sometimes it doesn’t.
When we do make that sale, the costs that go to making that “thing” or delivering that service, that’s your variable cost. You don’t make a sale, you don’t have the cost; you make the sale, and you spend the money to deliver it.
Variable costs, or Cost of Goods Sold, are like those slightly uncomfortable heels you wear to fit the occasion; they only come out when you need them. They include expenses such as raw materials, direct labor, commissions, and shipping costs — basically anything that varies depending on how much you produce or sell. When sales are soaring, they're right there with you, pumping up the volume. But when things slow down, they gracefully step back, just like a dancer waiting for their cue. Variable costs are masters of adaptability.
AND THIS MATTERS BECAUSE…
Why do we care? What does it matter that there are variable costs and fixed costs?
It matters because we’re running a business to MAKE money, not lose it.
Variable costs can generally be worked out to be a percentage of our sale price. If we sell a necklace for $100 and it costs us $30 in raw materials and shipping, then our costs are 30%.
The amount remaining – the $70 – is what we have left to cover our fixed costs. This is our Gross Profit. Now, it’s not often that our overhead can be covered by just one sale. Man, even our cell phone bill costs more than that!
If in some microcosm of a world, we ONLY have a cell phone bill for our fixed costs, and say that your monthly bill is $150/mth, this means we need to sell 3 necklaces to pay that bill.
So, when we sell three necklaces, we have enough gross profit to cover our overhead (aka our cell phone bill), with $60 left over to go for dinner!
Now what if it’s a good month and you sell 10 necklaces?
That’s a MUCH better dinner out, hey?
So, embrace your fixed costs and hug your variable costs — they are both essential. Keep an eye on your expenses, understand where they fit, and plan accordingly. When you know these costs, you can take the next step of figuring out how much you have to make to keep your business afloat. But that’s a story for another day.
Until next time, keep dancing to the rhythm of your own success!