I recently attended an industry conference and was sitting in the hotel bar on the evening of my arrival unwinding with a quiet drink when an old colleague of mine walked in, dishevelled, but smiling. He plonked himself down on the stool next to me and after our initial greetings proclaimed that he would be getting the next round. Unused to such largesse from this particular individual, I curiously enquired as to its cause. He proudly informed me that he had saved so much money getting here via a certain budget airline that shall remain nameless, that he wanted to spread the love.
My eyes opened when he informed me of the ludicrously low ticket price.
“What about additional charges?” I asked casually.
“Oh, yeah, there were taxes and some other charges, so it actually came to a bit more when it was all done.”
“Did you have to pay to check bags?” I continued with my line of enquiry.
“Of course, there was a check-in bag fee. My bag was the wrong shape and 1kg overweight, so it ended up being a bit more, but still well worth it.” He was starting to get a bit defensive. It turned out that he had also neglected to book in online and had to pay a $10 boarding pass fee as well. He was starting to squirm, and I was beginning to enjoy this.
“I see,” I smirked. “How much did the taxi from the airport cost?”. His face fell. It turns out that said budget airline flew into a small, regional airport about double the distance from the hotel as the main hub. Unsurprisingly, he had paid twice as much to get here as I had.
We did a quick calculation on the back of a Heineken beer coaster, which included his $5 bottle of water and $17.50 in-flight sandwich. My poor friend was utterly crestfallen to discover that when all the hidden, extra and related charges were calculated, he had, in fact, paid well over $100 more to get here than I had.
“Put your wallet away, mate. Drinks are on me.” I consoled him, only slightly condescendingly.
The Devil is in the Detail
In business, just as in air travel, it pays to have a firm grasp of your cost structures and profit margins for each product in your inventory. This is never truer than for importers, for whom calculating landed costs is a critical part of their accounting processes. It is a mystery then that so many organisations, particularly smaller businesses, only account for the supplier’s purchase price in their calculations. This is a recipe for disaster. It is guaranteed to leave you wondering why there is red ink at the bottom of your P&L, when you’re making a decent margin on all your products.
So, what costs should you be accounting for? Here are the main ones:
- Freight
- Import duties
- Insurance
- Container charges
- Storage
- Brokers fees
If you are not taking these and other costs into account, you may be grossly overestimating your profit margins. Let’s say you’re importing a widget from China that costs you $20 per unit and you sell it for $35. Sounds healthy, right? Maybe. However, if you factor in $7 for freight, $4 for insurance, $3 in duties and $2 in brokers fees, suddenly you’re losing money with every unit that you sell. You may either need to raise your prices or discontinue that product to remain viable.
Coming Out in the Wash
We see far too many potential clients that tell us that they simply account for all these items as general business expenses and that it “all comes out in the wash”. Let’s be very clear here: failing to accurately calculate your landed cost is like the beetroot juice soaked shirt in the hamper. It does NOT come out in the wash. It simply leaves you with an entire load of light pink stained laundry. Similarly, not attributing costs correctly against each product will impact your entire accounting process.
Understanding your landed costs will help you to:
- Know the profitability of each product
- Optimise your product range and inventory
- Set accurate pricing
- Identify areas to achieve savings in your logistics and supply chain
- Create accurate financial reports
Too Hard Basket
Nobody is saying that all of this is easy. Ascribing a per-unit cost for each of the above-mentioned items can be complicated. Freight may be charged as a flat fee, by weight, or as a percentage of value. Duties can vary from product to product, as can insurance. For SME, working all of this out can be a massive headache. The temptation to bypass all this complication and account for these costs further down the ledger is therefore understandable.
Endeavour Solutions ERP Helps You Accurately Calculate Your Landed Costs
With Endeavour’s Greentree ERP solution, these issues are a thing of the past. We work closely with our clients to deeply understand their supply chain and configure their systems to accurately calculate all purchase, transport and import-related costs to provide a realistic view of the profitability of every item in their inventory. Armed with this powerful information, you can make smart business decisions that will ensure your bottom line remains healthy.
For more information on how we take help take landed costs out of the too-hard basket, contact us today, and we’d be delighted to hear your challenges and see how we can help you overcome them.
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