Cost Accounting for Everyone

Dec 10, 2014

We’re beginning our latest cost assignment this week, where we have been asked to assist a very successful start-up company operating in a high-tech industry. This entrepreneur is quite talented and has a vast understanding of this industry. She has also been able to enter into this market quite seamlessly¬†and has far exceeded the quality and service her customers expected. To her credit, they have had tremendous increases in volume from their launch two years ago. Unfortunately, they have been unable to bring appropriate profits to the bottom line.

ProfitImprovement2This business meets many of the criteria that are required for new and emerging companies to be successful in today’s highly competitive, technically oriented business environment. Although this company is located in Toledo, Ohio, they have national reach and are dealing with clients across a broad geographical area. As a casual observer, it would seem as likely that such a business would be extraordinarily profitable and provide adequate rates of return on investments of talent and capital. However, that is untrue in this case and the entrepreneur has been frustrated in her attempt to find adequate advice to remedy the problem. We spent our first meeting with this client attempting to get a grasp of the types of customers they are dealing with, the kinds of services and products that they are providing, and some idea about how their record-keeping has been arranged.

What we learned through all of this, is that in this industry some of their rates are market driven and some offer more discretion. The market driven rates are widely available and price-competitive so that their ability to command higher fees in those areas is extremely limited. However, it is also true that they are providing high levels of highly specialized services that are not readily available in the marketplace, and therefore, offer a far greater freedom on how billing rates could be determined. Our job is to assist this entrepreneur in determining what the cost per hour to provide those services truly are. We will also offer suggestions as to how the billing rates might be computed in order to provide the highest levels of profitability available while still remaining competitive in a highly competitive industry.

I believe this owner fully understands that she has some components that can be priced in relation to the value they are delivering, but that other components must be priced more in line with current market rates. It will be our job to organize their cost structure and billing rates to cover all the costs of the company with an adequate margin to compensate the entrepreneur for the investment of capital and talent.

Categories: Cost Accounting