Not knowing your cost of production has a large impact on profitability, says a provincial business expert.
“Knowing how much it costs to raise, grow, produce, or process your product enables you to calculate the price you need to make a reasonable profit,” said new venture specialist Marissa Brewer. “Going from a base cost of production also helps determine the income your operation needs to earn to cover all costs.”
What if you can’t find enough customers to buy your product at your target selling price?
“This could mean your product is priced too high and you may need to find out if you can afford to reduce your price. However, reducing your price while having the same cost of production as before will mean the difference will come directly out of your profit. This is not a sustainable approach for most businesses.”
The best approach is to analyze your expenses or costs that contribute to your cost of production and identify what factors have the greatest impact on your cost of production, said Brewer.
“This way, you can determine if anything can be done differently to cut costs. For example, one idea might be to switch to a different packaging supplier or invest in a more efficient packing equipment to reduce both your packaging and labour costs. Doing this might reduce your selling price without sacrificing your profit margin and the overall health of the operation.”
Adjusting cost of production is a very powerful way to increase efficiency and improve profitability, she added.
“Those that track their cost of production from month-to-month and year-to-year can quickly review their data to determine if costs are changing over time. Doing this makes it easier to re-evaluate production practices and regain efficiencies and savings. The better handle you have on your cost of production, the quicker you can react to changes in prices and costs, and ensure you remain profitable.”
A video on understanding production costs, along with an e-learning tool, can be found at agriculture.alberta.ca.