One of the bigger issues I see Small Business Owners struggle with is how to price their product or services. They have a price, often calculated on materials and labor, but it isn’t giving them a profit. So they artificially create an “add-on” profit” charge for their product or service.
At one time or another you might have heard the word “Value Stream”. A Value Stream is every single step in the end-to-end process for creating a Product or completing a Service from the moment of Order Entry by Customer Service, to the ordering and delivery of Supplies, through the end-to-end cycle time to make or complete the product, to Packaging, Labeling, and Delivery to the hands of the Customer. There is a Value Stream for each and everything you make or sell.
What’s a Value Stream?
A Value Stream is only concerned with cost containment; putting as much value as possible into each product or service for the same dollars. The biggest dilemma that most small businesses are challenged with is
“How Much Should My Product Or Service Cost Me, and How Much Should I Sell It For”
Every single product – or Value Stream” has a different cost.
Let’s start with one Value Stream.
It all gets down to Margin, some people call this Gross Profit – your only real controllable money from your time. And your time is broken down into Minutes a month
If you have 8,400 work minutes available for each worker per month, you will want to know how many actual billable workers X 8,400 minutes a month are paying for all of the non-Cost of Goods Sold workers (indirect labor) in your company who must show up whether you have $1.00 or $1,000,000 dollars of work each month.
What will become more and more important in the your methods is the cost per Man Minute. For now, focus on one Value Stream – One product or service that you produce. How many individual steps must be performed and completed from the moment the order is taken by Customer Service, to the moment the End Customer signs off with a satisfactory acceptance, and from that moment through your receipt and deposit of the payment for that invoice.
Think through every motion, every moment, every step. Think through the quality issues at each step, the standard instructions that every person must perform to, the consistency that is demanded between one person and another in the chain, the accountability of the Quality and the information that is needed for each step.
How many minutes does it take for each person to perform each task on the average? You are NEVER really selling anything more than your time. You aren’t selling widgets. You aren’t selling online ideas. You aren’t selling shoes or groceries. You are only selling time.
You might be paid extremely well for each minute of time. Perhaps many hundreds of dollars or much more for every minute of your time to produce. But it’s all about the total monthly “Minutes” that you have to sell every month X the number of people that touch each step in every Value Stream for every different product or service.
We recommend you use 8,400 available work minutes for every billable person per month.
Let’s try an example using $60,000 as your Net Profit and an Indirect Workforce (Non Cost of Goods Sold) of 5 people. Your Net Profit is sales minus anything it takes to produce or deliver the product or service ONLY. This is not any of your materials, rents, utilities, etc.
Normal Monthly Net Profit $60,000
Divide. by the total no. of chargeable people 5
Divide by 8400 Minutes = $1.43
We have a Cost Per Man Minute of $1.43 for every minute that every Indirect person in your company shows up for 1 minute or for 24 hours a day of work.
The Man-Minute includes all costs and profit for the company regardless of what the employee is doing. Going to the bathroom, doing Facebook online, putting on lipstick, taking a lunch break or working on a project.
REMEMBER: There is no such thing as a non-chargeable employee. Every Indirect Employee in your company is affecting your financial picture in some way by doing activities and tasks that will either Increase revenue, widen your margin, contain costs or reducing costs.
Every employee is always affecting your Cost Per Man Minute and therefore must be held accountable to the profitability of the company by being measured.
We have just calculated your COST PER MAN MINUTE. Now that you have a cost per man minute, which is the TIME that goes into every product you make, all that’s left to add to the product is the direct costs to make it.