The Cost of Doing Business Formula: 3 Smart Steps to Follow

The Cost of Doing Business is nothing but an equation that includes non-reimbursable expenses plus your desired salary. To figure out how much you will need in order to sustainably run your company, take a logical and comprehensive approach when thinking about your cost of doing business (CODB).

The Cost of Doing Business Formula: 3 Smart Steps to Follow

The cost of doing business formula is a comprehensive approach to figuring out how much you will need to sustainably run your company.

Before we even think about putting numbers on any of our services, we must have a solid grasp and understanding of our cost of doing business (CODB).

This may be referred to as CODB because the word "cost" is right there in the name. You'd think this would be an easy calculation, but it's not. It's not easy because the CODB is a combination of many different factors and variables, some more fixed than others.

Your CODB is the result of a sequential equation. Non-reimbursable expenses plus your desired salary equals total annual costs.

What is the cost of doing business?

The Cost of Doing Business is nothing but an equation that includes non-reimbursable expenses plus your desired salary. The total annual costs divided by the number of billable days equals CODB.

To figure out how much you will need to sustainably run your company, take a logical and comprehensive approach when thinking about your cost of doing business (CODB). It is important to take this seriously to understand your financial needs and demands when starting.

The billable day is the number of days that you are open for business, i.e., if you're an accountant who works Monday through Friday, then your billable days equal five (5).

If you work every day, but only conduct business on weekdays, then your billable days equal five (5). If you work Monday through Friday and conduct business on Saturday as well, then you have six (6) billable days.

Likewise, if you're a delivery service that only operates on Saturdays and Sundays, then those two days equal your total number of billable days. You will need to figure out how much you will make each day, to calculate your CODB. In the end, it's simple math!

This comprehensive approach has a simple equation. Your total annual costs divided by your number of billable days equals CODB. You have to know the strategic planning to reach your business goal.

What is the cost of doing business formula?

The Cost of Doing Business Formula is a simple equation that includes total annual costs divided by your number of billable days.

The CODB equals your desired salary plus non-reimbursable expenses. This comprehensive approach has a logical and simple calculation to figure out how much you will need to sustainably run your company.

Now that you have put together all of your expenses, it is time to create your cost of doing business formula.

Your CODB equals the sum of your non-reimbursable expenses plus your desired salary. This comprehensive approach has a simple calculation to figure out how much you will need to sustainably run your company.

Types of Costs

  • Direct Costs: Direct costs are those expenses that can be directly traced back to a specific product or service sold by the business. It is possible to calculate your direct costs by using a product-costing system, where you assign the cost of each item sold to the inventory account until it is sold.
  • Indirect Costs: Indirect costs are all other expenses required for running the business not covered indirect expenses. They include items like rent, administrative salaries, and other operational expenses required to keep the business running.
  • Selling Expenses: Selling expenses are those associated with selling goods or services to customers, including order taking, shipping charges, and marketing costs like brochures and commercials.
  • Total Annual Expenses: To arrive at total annual expenses (also known as CODB), add up the following cost categories: direct costs, indirect costs, and selling expenses.
  • Non-Reimbursable Costs: Non-reimbursable costs are those that cannot be passed on to a customer. They include items like rent, administrative salaries, utilities, taxes, insurance, etc.
  • Desired Salary: Your desired salary is the amount you want to earn each year, and it must at least cover your direct costs (i.e., the cost of labor).
  • Number of Hours Worked: The number of billable hours worked is equal to 1,600 divided by your desired salary. If you want to make $40,000 per year and you work a 40-hour week for 48 weeks in a year, then your number of billable hours is 80 (1,600/40 = 40 x 48).

Different Situations That Require CODB Calculations

The following are examples of different situations where you will need to do a cost of doing the business calculation.

1. New Business: An existing company decides they want to open up another location to expand their business.

2. Outsourcing: A company decides they want to outsource some of their labor to streamline operations. This means that they will no longer need the same number of employees that they did before.

So it is important to know what portion of revenue should be assigned to labor expenses so you can determine whether or not outsourcing will be beneficial.

3. Expansion: A company that is already in business decides they want to expand their operations by adding a new product line or making some major changes to how they run their current business.

How do we calculate it??

There are a few ways to approach this equation, and you can choose which way is easiest for your business. You can take the total annual cost of all non-reimbursable expenses such as rent or equipment costs and add them together.

Then divide that number by the number of days in your accounting period. This gives you a daily cost of doing business which can help guide your budget decisions on an ongoing basis.

1. Collect the Receipts!

You can also use a different approach to calculate CODB. This one requires you to gather all of the receipts from your business expenses and add them up for each day in your accounting period.

If these costs are significant, then divide that number by the total days in your accounting period (e.g., month or year). This can be a great way to highlight which days of the month your business generates the highest expenses.

Receipts to collect include:

  • Utilities (electricity, water, gas)
  • Rent/Mortgage
  • Salaries and wages (this includes not only your salary but also the salaries of any employees you pay)
  • Telephone and Internet costs
  • Office supplies and equipment
  • Building maintenance fees
  • Marketing expenses like brochures and flyers
  • Car or fuel costs if you use them for business purposes (keep track of how many miles you drive each week)
  • Payroll taxes like unemployment, FICA, and others (from your employee's salaries)

2. Set Your Rate

Managing your time is the first step towards managing costs and increasing productivity as an entrepreneur or small business owner.

Setting your hourly rate is a great way to keep track of the time you spend on specific projects or tasks.

This can help guide budgeting decisions as well as identify which areas are taking up too much time and need adjusting to achieve goals within certain timelines.

Your rate should be sufficiently high enough to cover your CODB plus the cost of non-reimbursable expenses, as well as an acceptable profit margin.

It can take some time to determine an appropriate rate, so keep track of your time and take note of what you earn for each hour.

When you work for someone else, they usually pay you bi-weekly or monthly. As an entrepreneur, it's important to manage deadlines and projects within reasonable timeframes (e.g., by the end of each week or month).

One easy way to do this is with an online invoicing system that allows you to create a draft invoice and send it for review before you submit it.

Using an invoicing system can help you keep track of outstanding hours as well as the status of each project. If you're using online invoicing, then your clients will also have access to this information through their accounts.

This allows them to quickly identify that you are working on their project. It's important to understand all of the factors that play into how much it costs you to run your company so that you can plan accordingly for future growth and financial success!

3. Do the Math

Once you have gathered all of your receipts, it's time to crunch some numbers. For calculating your cost of doing business (CODB), there are a couple of different methods available:

  • You can add together the total annual costs of non-reimbursable expenses such as rent and equipment.
  • There is also another approach that requires you to gather all receipts from your business expenses for each day in your accounting period. This allows you to see which days of the month your business generates the highest expenses.

The essential formula for figuring out your bottom line (aka your CODB) is:

Expenses + Hourly Rate x Hours Calculated = Bottom Line

It can be a great way to highlight which days of the month your business generates the highest expenses.

Your CODB is the result of a sequential equation. Non-reimbursable expenses plus your desired salary equals total annual costs.

To begin, go through all of your non-reimbursable expenses and add them up. Don't forget to include any office equipment or furniture you have purchased, including computers or printers.

The final step is to divide that number by the number of days in your accounting period. This gives you a daily cost of doing business which can help guide your budget decisions on an ongoing basis.

It's important to understand all of the factors that play into how much it costs you to run your company so that you can plan accordingly for future growth and financial success.

Remember, the cost of doing business is not free, but it can guide your budgeting decisions by giving you a benchmark to compare costs against for growth planning.

Why is it important?

The Cost of Doing Business is important because it allows you to figure out how much it will cost each year for your company.

You have to learn about the importance of this formula, and you should know how to calculate your CODB. The important thing is that it gives an idea of ​​how much you will spend every month.

By identifying the cost of doing business, we can be better prepared for the future and adjust our budgets accordingly.

This comprehensive approach has a simple equation: total annual costs divided by the number of billable days equals the cost of doing business (CODB).

1. Operational costs

Operational costs mean the cost of doing business. It can be a challenge for owners and managers to identify their total costs of operation and find ways to control them.

However, this insight can be especially valuable when attempting to optimize expenses and set a business budget for upcoming quarters.

Everyone in the business needs to understand their total costs to operate well. This can help managers and owners control expenses, optimize them and set a budget.

This is because operational costs are one of many things that eat away at a business’s profits and cash reserves.

According to a startup post-mortem report by CB Insights, 29% of enterprises cited a lack of capital as the primary reason for closing down.

Therefore, it makes sense to regularly identify areas within the business where it is possible to limit expenses. This can optimize business practices by informing owners on areas where they may be overspending which could prevent unnecessary losses in capital.

2. Direct and Indirect Costs

Direct costs are expenses that can be directly linked to the production or delivery of goods and services. It's for this reason that many variable costs can also be considered as direct costs. However, certain fixed costs, like the cost of renting a manufacturing facility, can also be tied to production.

Examples of direct costs include raw materials, manufacturing equipment, and wages of production staff.

Indirect costs, on the other hand, are expenses that cannot be directly linked to a product or service delivered by your business. Instead, indirect costs can impact many areas of your business.

Examples include rent for the entire building housing the company's offices and utilities like heating/cooling systems in those offices as well as office equipment like computers, printers, and telephones.

Business managers must understand the distinction between direct costs vs indirect costs to accurately estimate total expenses that are associated with running a company. This is because both contribute greatly towards determining the cost of doing business (CODB).

3. Product and Period Costs

Product costs are associated with the production and sale of goods. With retailers, for example, this can include the total cost of supplies plus costs related to delivering them to the warehouse.

Meanwhile, period costs are closely associated with the passing of time or a particular accounting period e.g., month or year.

Examples may include an organization's rent expenses, administrative assistants' salaries, rent for the office building housing company's offices, and utilities like heating/cooling systems in those offices as well as telephones.

It is important to understand that product costs can be treated differently than period costs when recording financial information on a company's balance sheet or income statement.

For example, product costs are often recorded as inventory assets when the goods are unsold and become costs of goods sold as soon as they are purchased by consumers.

Period costs, on the other hand, may be considered a period expense or capitalized based on whether their useful life extends beyond one reporting cycle. If so, these expenses can be included in calculations for the cost of goods sold and in setting a business budget for upcoming quarters.

4. Fixed and Variable Costs

Fixed costs, also known as overhead costs, are incurred regardless of output. Examples of this would include rent, property taxes, and insurance payments.

On the other hand, direct costs can also be considered as fixed costs depending on a company's product or service offering. For example, raw materials used in production is a common type of cost that is fixed until it is used up.

Examples of variable costs would include hourly rates for workers on a per-project basis, or the cost to ship goods from warehouses to individual customers.

While both contribute greatly towards determining the total expense associated with running a company, direct and indirect costs are differentiated by whether they can be directly traced back to a product or service.

5. Forecasting of Future Sales and Labor

Forecasting future sales is a complicated process. Predicting future expenses, on the other hand, is much more simple.

Accurate calculations regarding a business's total annual costs, including how much money the enterprise will need to spend on rent, payroll, utilities, manufacturing, and shipping are helpful starting points when developing other forecasting projections for sales revenue and demand.

With a clear understanding of how much it costs to run the business and what is required for future expenses, owners can make more informed decisions when planning budgets and upcoming investment needs.

6. Calculating a Company's Cost of Doing Business

The CODB is the total expense required to produce and sell goods or services. It includes indirect costs, such as salaries for administrative assistants, along with any product costs.

It also involves taking into account company assets like inventory and property, net of depreciation, to accurately calculate operating expenses and overhead.

This figure can be used to set sales and revenue forecasts while also helping owners determine what the CODB is for other products or services they may want to offer their customers in the future.

More importantly, it gives an accurate understanding of how much it costs a business to operate at any given time. This allows owners to make intelligent decisions about pricing, sales forecasts, and company expansion.

As long as owners have a strong understanding of what it costs to run their companies be it the CODB or an alternative calculation based on product costs they can make smarter business decisions with better information.

That's why knowing how to calculate the cost of doing business is essential for owners new and old.

7. Calculating the Cost of Goods Sold (COGS)

The COGS is one of the most important numbers in any business owner's book.

It represents the total expenses associated with purchasing raw materials for production, assembling them into finished products, and then selling these items to consumers or other businesses.

However, many entrepreneurs find this process challenging especially with so many variables to consider to produce an accurate projection.

To ensure you are on track towards achieving your business goals, make sure you understand the cost of doing business (CODB) formula as well as how to calculate total expenses associated with running a company.

As long as you have a good grasp of your CODB and COGS numbers, you can be sure that your company is headed in the right direction.

8. Sample Calculations for Cost of Doing Business (CODB) Formula

The cost of doing business understood as the total expenses associated with running a business can be calculated in their main steps:

1. Identify direct costs, indirect costs, and selling expenses

2. Calculate total annual expenses to arrive at the CODB

3. Take into account assets and operating liabilities to calculate adjusted asset base

The following are sample calculations illustrating how to determine the cost of doing business formula for a fictitious company called XYZ, which makes and sells hats.

Conclusion

The cost of doing business can be a helpful benchmarking tool to evaluate the performance of a business and determine its market position compared to competitors.

After an owner understands their company's cost of doing business, they can then use this information to determine what actions need to be taken to improve the profitability and overall health of an enterprise.

If your total cost per product is lower than that of your competitor's consumer price, then you can review your processes to identify ways in which you can bring the total cost down so as not to fall behind on unit price sales.