HOW TO DETERMINE DIRECT & INDIRECT BUSINESS COSTS

Running a beauty business, any business to be honest, isn’t easy. Which is why I am here to help make sure you get your foundation right before you launch that business. And even if you are already a business owner/entrpreneur, it’s never too late to make the necessary adjustments.

In this brief post I am going to touch on a business process I believe is very crucial, especially if you intend for your business to eventually grow and expand, determining the difference between Direct Costs & Indirect Costs.

 

DIRECT & INDIRECT COSTS

Direct business costs are a lot easy to identify, these are the costs & expenses that contribute to the production of your goods or fulfilment of your services. For example, if you are a Makeup Artist the makeup in your kit is a Direct Cost. If you own a Beauty Store, your rent is a Direct Cost. I could go on and on.

Indirect business costs are a little trickier to identify and often overlooked by entrepreneurs/business owners as personal expense or not even factored-in at all. It is crucial that all Indirect Costs be identified and captured, otherwise you will unknowingly be running your business out of your own pocket or at a loss. So examples of Indirect Costs could be: petrol in your car/transportation costs if you’re an Entrepreneur that moves around (e.g. MakeUp Artist, Nail Tech, etc.) or if you’re an Influencer: data, hosting fees, phone credit etc are indirect costs. Can you see why indirect costs could be a little harder to spot?

 

BUSINESS IDEA vs BUSINESS STRATEGY

Why is identifying Direct and Indirect costs important? Because they aid in determining whether your business idea or business strategy is viable. Business Idea and Business Strategy are two very different things…

When you have a Business Idea, say to retail makeup…. If a lipgloss costs ₦500 from the manufacturer and you retail it for ₦1000, you make a profit of ₦500. This is called the Gross Profit (Gross profit is profit made after Direct costs have been deducted). The Direct cost here is simply purchasing the lipgloss from the manufacturer. So based on your gross profit calculations, your business idea is viable.

Now let’s see if the Business Strategy is viable too. So you’ve decided you want to retail this lipgloss, how much does it cost to ship it in from the manufacturer? Will you be doing this online? There’s domain name cost and monthly hosting fees. Will you have this item delivered to the customer? What sort of product packaging (shopping bags, boxes, etc.) will be used. Do you plan to market via social media? There’s data costs, acquiring a decent phone for pictures or investing in a camera, paying for sponsored ads. I could go on, but what ever is left of your ₦500 profit after all these indirect costs are deducted will be your Net Profit. So based on net profit calculations clearly your business strategy isn’t viable. (Net profit is profit made after Indirect costs have been deducted)

So from the example above, just because the business idea is viable doesn’t mean you go right ahead and start a business, determining direct and indirect costs is crucial… especially in the early stages.

To make things easier I have created a little ‘game’ for us to play. Identifying Direct Costs are a lot easier than Indirect Costs, so this game is more so for you to look a little closer at your business and make sure you are not paying for certain business expenses out of your pocket.


IDENTIFYING DIRECT & INDIRECT COSTS

We will use two business scenarios to illustrate.. The first is a Makeup Artist and the second will be a Skincare Manufacturer. I will provide 10 business costs, half of which are Direct, the remaining half are Indirect. Your task will be to sort them out. I have provided the answers for you to check, but try not to peek before. As a hint, Direct Costs are usually identified at the business idea stage, while indirect costs come up during the strategy stage.

 

MAKEUP ARTIST

 

 

 

SKINCARE MANUFACTURER


MAKEUP ARTIST

DIRECT COSTSINDIRECT COSTS
EYESHADOWTOLL-GATE CARD
STUDIO RENTPHONE DATA
MAKEUP CHAIRCAMERA
RINGLIGHTREFRESHMENTS
DIESELUBER

 

SKINCARE MANUFACTURER

DIRECT COSTSINDIRECT COSTS
PACKAGINGMARKETING
RAW MATERIALSPHONE CREDIT
LABOURLOGISTICS
MANUFACTURING COSTSSTOCKIST FEES
FACTORY RENTSTORAGE COSTS

Just because an idea is profitable doesn’t mean it can translate into a sustainable Business.

After these exercises you should be better able to distinguish between your direct and indirect costs. Both are equally important to identify as you grow and expand your business.

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Muna is a finance professional and beauty enthusiast based in Lagos. She is the Principal Consultant at MASAL Consultants, a financial management firm that provides: public accounting, bookkeeping, financial planning & advisory services to SMEs, Entrepreneurs and Private Individuals.

You can find her:

Instagram @Masal.Consultants

Twitter: @MasalFinance

Email: consult@masalconsultants.com

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