START YOUR OWN BUSINESS
WORK BOOK 4
Work Book 4: Business Viability
What costs do I need to consider – and what’s the difference between startup, fixed and variable costs?
How much do I need to sell to cover my costs and draw a living from the
Is my business likely to be profitable in the future?
How much should I be charging for my product/service?
SETTING YOUR PRICE
Having looked at the idea of PRICE from a marketing perspective, it is also
necessary to consider price from a financial or costing perspective.
Some businesses make the mistake of looking at what price is being charged by
others and simply setting their price at the same value. After some time it becomes
apparent that the product or service is being provided at a loss and this puts the new
business venture in difficulties.
Below are some notes on how to cost your product or service. Firstly a distinction
between two different types of cost; Fixed and Variable.
UNDERSTANDING FIXED, VARIABLE & START UP COSTS
The definition of a fixed cost is one which does not vary in total when the level of
output by the business does vary. In other words, when the Sales level within a
business increases, fixed costs in total, would not increase. It also follows that when
the Sales level in a business decreases, the fixed costs would not decrease.
An example of a fixed cost for a business making a product such as a bakery would
be the business rates. For a business producing a service such as massage therapy
would be any costs associated with the rent or ownership of premises, insurance,
and costs associated with the ownership of equipment.
As fixed costs are not dependent upon the level of output (sales), they are often
expressed as being per period of time, for example annually, weekly or monthly.
It can be helpful to picture costs in the form of a chart.