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Articles editor Susan Greco can be reached at susan.greco@inc.com
THE REAL COST OF A BIKE DELIVERY
Diamond Courier charged $4.69 to make a downtown Philadelphia bike delivery. CEO Claudia Post estimated she was paying her messengers half that, leaving the other half to cover overhead and yield a profit. Since competitors with less volume charged as little as $3, she figured she had to be making money. (The industry's average margin is 5%.) Rigorous cost accounting, however, painted a different picture . . .
Total assumed cost: $4.46
Assumed profit: $0.23
Dispatcher's pay: $0.54. Bike jobs, Post discovered, ate a disproportionate amount of each dispatcher's time.
Telephone charges: $0.14. Messengers were always calling in to the office.
Miscellaneous: $0.07. Small office expenses included the bikers' T-shirts.
Allocated overhead: $3.60. This covers Diamond's managerial and administrative salaries, rent, insurance, collection costs, and so on -- averaged for each delivery.
Customer service: $0.57. Service reps handled customer relations and kept records -- a lot of work for such low-ticket transactions.
Workers' comp: $0.09. Post's bikers were part of a national insurance pool.
Messenger's pay: $4.23. This includes wages and commissions ($3.87) and payroll taxes ($0.36). Messengers were averaging fewer than half the three deliveries per hour Post had assumed -- meaning many never qualified for the 50-50 commission split Post had based her mental profit model on; instead they collected a guaranteed hourly wage.
Total actual cost: $9.24
Actual profit:: ñ$4.55
BIKE DELIVERY: PROFIT AND LOSS
Post's imagined per-job P&L . . .
Revenue $4.69
Messenger's pay* $2.35
Overhead and profit* $2.34
*Approximate
. . . and the actual P&L she uncovered
Revenue $4.69
Messenger's pay $4.23
Overhead (direct and allocated) $5.01
Profit (loss) ($4.55)
One-year financial results for the bike-messenger profit center
Revenues (on 71,658 jobs at $4.69/job) $336,000
Direct labor (messengers)
Wages and commissions $277,000
Payroll taxes $26,000
Gross profit $33,000
Direct overhead [1]
Dispatching $39,000
Customer service $40,700
Workers' comp insurance $6,800
Miscellaneous office expenses $5,000
Telephone $10,000
Allocated overhead [2] $257,655
Total overhead $359,155
Profit (loss) ($326,155)
[1]Includes all costs directly attributable to bike deliveries. [2]Costs not directly linked to bike deliveries but apportioned according to level of activity -- number of bike jobs, for example.
RESOURCES
The information contained in the resources below can help entrepreneurs think smarter about costing, pricing, and business-unit profitability
ARTICLES
A free three-page executive brief on activity-based costing, a useful tool for companies whose overhead is growing as fast as their direct costs, is available from ABC Technologies, in Beaverton, Oreg. (800-882-3141). A 16-page manufacturing case study, "Why You Should Consider Activity-Based Costing," can be obtained free from Small Business Forum (800-419-5018). To see how the practice works in service companies, order a reprint of "Tracking Costs in a Service Organization," published by Management Accounting (800-638-4427, extension 280) in February 1993, which explains how Fireman's Fund uses activity-based accounting.
BOOKS
Accounting and Financial Fundamentals for Nonfinancial Executives, by Valarie Neiman and Eileen J. Glick (AMACOM, 800-262-9699, 1996, $18.95), covers the basics of cost accounting, the contribution concept, and other management tools. Two recent works demystify pricing and are well suited to service companies: Priced to Sell, by Herman Holtz (Upstart Publishing, 800-829-7934, 1996, $27.95); and No Apologies Pricing (Home Based Business Association of Arizona, 602-464-0778, 1995, $9.95), a 52-page booklet worth its price because of its wonderful simplicity.
SOFTWARE
Tracking costs is made easier with the "job costing" modules available with major accounting-software packages. See "Ledger-demain" in the June issue of Inc. Technology ([Article link]).
EXECUTIVE ED
In a course in strategic planning offered by the respected Council of Smaller Enterprises (COSE), 30 company owners convene on Saturday mornings to analyze how they're making money (or not). Students team up with past graduates of the course, who serve as their mentors. The price: $2,695. Courses, which are held in Cleveland, Dayton, and Louisville, start in September and October. Call COSE at 216-621-3300 for more information. The 1,400-page course book can be had for $250; send a request to j.sussbauer@csuohio.edu by E-mail.
ON-LINE
A primer on how to do a business-unit "contribution-margin analysis" is available at Inc. Online in the Interactive Worksheet area. The worksheet is titled " Is A Product or Customer Costing More Than It's Worth?"
