This is actually from an accountant

No, amazingly, not that accountant.

How can small businesses regain their feet during the present COVID-19 crisis?

Bob’s suggested answer was:

I would offer: try marginal pricing.

Turnover is comprised of direct costs, fixed costs and profit(loss). At the very least businesses could exclude the profit element from their prices to make a contribution. A widget sold for £100 (pre-covid19) with a direct cost of £30, fixed costs recovery of £30 and profit of £40, could be sold for £60 and the financial position of the company in the short-term would be unaffected?

Rather missing that gross profit and profit are different things, no?

17 thoughts on “This is actually from an accountant”

  1. Bloke in North Dorset

    Related.

    A mug seen on Twitter:

    EBITAC
    Earnings Before Interest Tax Amortisation Coronavirus

  2. So what proportion of an accountant’s charges are profit?
    Is the guy offering free accountancy? It should keep him busy!

  3. Actually, a lot of businesses are doing that, but also reducing their fixed cost cash outflows by not paying their rent or mortgage, insurance or other bills. They haven’t eliminated their fixed costs; they still owe the rent, but that’ll get worked out with the landlord sometime down the line. But in the meantime the business’s owners might scrape something of an income for themselves.

    There’s a good chance, though, that their suppliers won’t supply them unless it’s cash on the barrelhead.

  4. Dennis, CPA to the Gods

    The dumb motherfucker is simple, if nothing else.

    And he’s got his cost accounting wrong, which means he has his costing – and pricing – are wrong. You don’t cost on the basis of adding fixed and direct costs. Because per unit costs vary with level of output. Fixed costs decrease on a per unit basis as output increases. Variable and mixed costs can also change for a variety of reasons linked to output levels.

    In the real world there are fixed costs, variable costs and mixed costs. Those three variables, as well as output level, are what you use to calculate per unit cost in a production cycle. That’s Cost Accouting 101.

    So the bottom line is that Bob doesn’t know is ass from his elbow.

  5. Mixed cost is a rare bird. I never saw any in my corporation.

    If we are going to do Cost Accouting 101, let’s do Business 101. For basic pricing, you balance margins and volume. “Cost” has FA to do with it.

  6. Bloke in North Dorset

    Business 101. For basic pricing, you balance margins and volume. “Cost” has FA to do with it.

    Really? I thought there were 2 approaches:

    1. Usually for services or one off goods, pitch for what you think you can get and hope it covers costs, eventually.

    2. For goods where there’s a clear market price. drive your costs down way below it.

    Everything else is management bullshit, which you’ve probably paid for using option 1.

  7. Dennis, Tiresome Denizen of Central Ohio

    For basic pricing, you balance margins and volume.

    And what he’s proposing is zero margins all at given levels of volume. That’s exactly when “cost” has everything to do with it.

    Mixed cost is a rare bird.

    But still a bird. Ergo, they cannot be dismissed out of hand.

  8. Mixed costs? Break it down, into those that are fixed and those that are variable?

    More usefully, step costs. Because in reality a large number of fixed costs aren’t fixed, they are step. Ie, they are fixed for changes in volume up to a certain point, then change abruptly (taking on an extra person, machine, space, whatever), and then carry on fixed again for a while. Where the steps might sit depends on what kind of items / business etc.

    Hence, the bigger the picture the more that the cost base is essentially variable in perspective – eg, business plan for an organisation versus detailed cost calculations for a product.

  9. Surely, these are the calculations anyone with a business they want to survive is making at the moment. It doesn’t need an assole in the comments of the blog of a fat retired accountant* to remind them of it.

    *Except some of the “professions” who’ll be after their pound of flesh whatever happens. Can’t help but notice said fat retired account sees the crisis as a way of making a personal profit has the begging bowl out for grant funding.

  10. “Mixed Costs” is a shorthand for “Costs that behave a bit weird in relation to volume that we can’t be arsed to analyse because they’re not all that material really”.

    Take the old style phone bills. Your rental element would be fixed but the call charges are volume related, but not to a volume that is connected to production volumes. You could analyse those and see what actually drives those call costs (lots of small-value orders versus fewer larger ones, perhaps … quality rework issues … poor suppliers needing to be yelled at …), there’s an approach called “Activity Based Costing” that tries to quantify this kind of stuff into patterns you can predict, but the point is that this kind analysis can easily cost more than the value you get from it if you’re not careful.

    And a good accountant would make that call and say “Yes, we could analyse that but it’s not worth doing. Call it a Mixed Cost, apply a suitable average formula and let’s go do something valuable instead”.

    I’ve got the CIMA qualification and 30 years in the game so I do know about this stuff. Economics – not so much, but cost accounting – I’m on that.

  11. “Turnover is comprised of direct costs, fixed costs and profit(loss)”

    Seems an arse about face way of saying it anyway.

    Turnover is comprised of your sales of goods or services.

    Mind you, as I cheerfully tell people, I work for a firm of accountants but I am not an accountant. 30 years of tax. And the company law I need to know for tax planning.

  12. Nice use of the word ‘contribution’ there.

    Perhaps ‘Bob’ is a communist. “The People thank you comrade, but next month the People demand double!”

    Anyway, surely the issue isn’t that many businesses can’t trade at current prices, but that many cannot trade AT ALL. If your garage is closed dropping your price by 30% makes fuck all difference.

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