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Your Cost Structure

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Your Cost Structure – What does it cost you to operate your practice under your chosen business model?

Take a look at the business model you have generated as you’ve done your worksheets, and list your most important costs.

Your costs are mainly identified through your list of resources and your list of activities.

 

So, take a look at the key resources you listed, what do they cost?

What activities are the most expensive?

Concentrate on the key costs, the costs that you must cover in order to deliver your offer to your target market, and your products or services to your clients and customers.

Depending on how you have built your model, you may have built your business “lean” or “cost heavy.”

An online payroll service may be a software driven lean operation as far as payroll costs are concerned, but the software overhead may cause the model to have heavy costs until sufficient volume is reached and economies of scale are achieved.

It is easy for a practitioner to fall into a trap of thinking that cost is the driving force in the typical prospects mind, and develop a cost driven marketing strategy, but not having developed a cost driven back end.

A cost driven marketing model focuses on cutting costs at every turn.

Working from home until volume warrants an exodus to warehouse type facilities. Outsourcing back office services to lower cost offshore providers. Or, streamlining operations to eliminate any wasted motion or effort.

Alternatively, you could build your business model using value propositions. Rather than making cost cutting the main focus of the enterprise, you could be working to increase the perceived value of your practice offerings.

This could include gaining intimate knowledge of the particular industry you are targeting, providing customized and personalized service, or possibly generating custom services and products.

Of course, it’s not as simple as those two extremes. Your practice probably falls somewhere in between.

Possibly you operate a lean office, except during tax season, at which time you ramp up and double, triple or even quadruple your staff.

Meanwhile, you add to your tax knowledge and are able to provide advanced tax and financial planning services which fall into the value pricing model.

And then there are the actual costs to consider. Once you know how your key resources and activities fit together, you can easily calculate or estimate your fixed and variable costs.

Once you know how your key resources and activities fit together, you can easily calculate or estimate your fixed… Click To Tweet

Besides having to consider fixed and variable costs, the cost structure will take into account the economies of scale such as those that come along with an expanded client base.

They can also include the economies that come from the sheer size of your firm.

The savings per person in software or research libraries, for example. Or, possibly being able to spread marketing costs across a larger base.

Whatever your costs structure winds up being, it will be the result of the structure of your business model.

And once you have described your current or planned business model, you will have defined what your strategy is or will be.

Whatever your costs structure winds up being, it will be the result of the structure of your business model Click To Tweet

Alternatively, once you are able to identify how your competitors business model is structured, you will be able to easily understand their strategy.

I’m including a simple budgeting worksheet that will give you some ideas as you start looking at your cost structure. It’s a simple Excel type worksheet, created in OpenOffice, with two goal setting models using two different goals. The first model is created from IRS industry statistics for SIC 8721. You’ll have to look up the new codes as they have recently changed to an NAICS coding system. The second model is created from my personal budgeting model.

Each of these models gives you a goal setting tool based on either a gross revenue goal, or a net income goal. You set either the gross revenue goal you want and see what your budget looks like, or your net income goal and see what your goals might be in that situation.

After you get a handle on your own practice model, you’ll want to create your own budgeting spreadsheet, based on your own revenue streams, resource costs, and target market penetration.

In your next lesson, we’ll have a capstone lesson on business models, then we’ll start talking about implementing your marketing tactics.

Join us here at Practice Builder Publishing and become a part of the community, whether you become a contributing author, a peer recruiter, or merely a raving devotee of the Practice Builder Publishing resources, I'll work with you personally so you can reach the goals you set.

Best to you and yours,

kirks-sig

 

Kirk

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