Hi, I am new to idea cafe and have found a lot of help here. I am trying to write my first business plan. I have a question. In counting inventory as an asset, I need to know how it is counted. We make crocheted items. Do I set the value at the total of what it is worth if it is sold, or the cost of materials and time involved in making the products. We have spent 3 yrs working on products of various types and have about 700 products. Any help with this would be greatly appreciated. Diane (ourwovendream)

Visit us at
http://www.ourwovendream.com
http://ourwovendream.etsy.com

I will be very interested to see what others say. I know that for inventory when I began, I counted my cost to purchase those items wholesale (plus any shipping costs to me).

Now that I am designing some of my own products, I take the cost of materials, cost of shipping materials to the person making my toys, her charge for labor per toy, and then add in cost of header card/product bag, to get my wholesale cost per toy.

I would think the question here is what do you pay yourself per hour? The cost of materials per item you can figure out, but you need to add a labor cost, even if you are providing the labor

Or so it seems to me.

Pat and Alix P. Curl

Hello,

Welcome to the cafe. Pricing takes experience and isn't easy for anyone. Also while there are formulas, none of them may be perfect for your needs so you may need to get creative.

The basic computation to use is Cost of Goods Sold or (COGS) + Expenses / units.

Beginning Inventory Cost = $50,000
Inventory Purchases for set period = $100,000
Remaining Inventory value end of period = $25,000
COGS = (50,000 + 100,000) - 25,000 = $125,000.

Basically all this means is what you've paid for inventory that sold during a set period. In the example above you paid $50K for your startup inventory of a single item, and over the next lets say 90 days spent another $100K on additional inventory. That leaves you with a total inventory cost of $150K. At the end of your reporting period you count the remaining inventory and calculate its value. In this case $25K. That means that you spent $125,000 on inventory for your reporting period of 90 days.

Now you can take that $125 and divide it by the number of units. Make sure that you do this for each item of the same basic wholesale cost, so if you have 2 items that cost a dollar you can apply the calculation and include both of them. Lets say your basic wholesale cost on this item is $2.00. That means you sold 62500 units at $2.00 each. Keep in mind we are dealing with wholesale costs at this point and not gross receipts.

Now you need to take your expenses for the same period and factor those into each unit price. Lets say your monthly expenses less inventory per month total $25000.00 per month. This includes rent, utilities, advertising, labor, your paycheck, and anything else it costs to keep the doors open plus some net profit goal you set. Don't forget that an item that takes up lots of floor space or requires maintenance and cleaning on the floor costs you more than one that sits on a counter rack.

Now add that total to the 90 day reporting period. These figures can be roughly translated into Cost of Sales (COS).

Cost of Sales $75,000
Cost of Goods Sold $125,000
Total $200,000

Price per item in this case if thats all the income that you have would be calculated based on the total costs divided by the number of units.

$200,000 / 62500 = $3.20.

So unit of this one type would need to be priced out at $3.20 in order for you to make your expenses plus inventory refresh and any financial goals that you have set.

This is important, you have to do this for each Item that you carry because you can get into additional labor or cost of sales for individual items. A $2.00 toy costs much less to sell than a $2.00 cup of ice cream because the toy only needs to be displayed and is self-serviced. The ice cream needs additional storage, labor, and is perishable so shrinkage occurs.

Ok, you've calculated that to meet all of your goals you need to price this one item out at $3.20 to "stay in the black". You aren't growing using this calculation. Now is where your knowledge of a market will come in. If you know that this item carries value beyond simple utility like sentimental meaning or will be purchased because its going to be something special to someone, you can up that $3.20 to say $10.00. This is easy to do with a low ticket item. Generally anything that is a commodity item you keystone or just double or even triple its value.

Investigate what other folks charge for the item and stay competitive. Any time you change how you sell the item you need to recalculate the cost and price of that item. If you add a part time employee or if you buy a more expensive display, or if your process for building the item goes up, then refigure that in.

Keep close track of sales and watch when the number of units sold goes up and down. Try to determine whether or not it was based on "that time of year" or on a price change. Don't be afraid to experiment.

Also, on lower ticket low cost items keep your margin (the difference between cost and net sales) very high. Go to the extreme of what your market will bear. This will keep your total net sales in line when you sell higher ticket items for a smaller percentage of the initial costs. An example would be a comb that costs someone a $.01 is sold at a $3.00 while a sofa might cost $500 but the final retail price would be $750.

I know that it sounds like a lot of work but if you get a decent business accounting system like Peachtree or Quickbooks Pro they do these calculations for you. Its a little bit of work to set up but invaluable when it comes to answering questions like this one.

There are more complex valuation methods as well, however, for most of what you will do this one should be adequate. As you get more experience and learn what your customers will deal with you can start to raise prices to the outer envelope.

On a final note, pricing is as much about perception as it is about actual costs. If you go into a Nordstroms and purchase a silk scarf it might cost $50.00. However, you could go into a "Mart" of some flavor and find the same scarf but it only costs $15. Its the prestige factor and the perception of quality. People perceive that you are charging more because this is a better item that the one that costs less. You can control that by keeping your decor and presentation up and train your sales help or yourself to upsell the items. This really works!

Best of luck.

"Things are difficult only while you don't understand them."