Introduction for number enthusiasts: this is not your usual boring finance article. Here, we’re speaking the language of entrepreneurs, not analysts! If you’re already a cost management champ, consider this a fun refresher. Otherwise, get ready to explore this fascinating world in a simple, straightforward way. Let’s go!
After navigating the sea of revenues together, it’s time to dive into the world of costs. If you missed the first stop on this journey, here’s the link to the previous article. Today, with your ice cream apron tied on tight, we’re going to explore the magical world of external costs.
It’s May, the scent of summer is in the air, and you, as a savvy ice cream maker, are already planning how to stock up on supplies for the entire season. Your attention is captured by a tempting offer: 50,000 ice cream cones at €0.25 each—a real bargain!
Without hesitation, you confirm the order; to avoid misunderstandings, you decide to send a formal purchase order with all the details of your request.
You send the order and hop into your banking app to initiate the transfer. You’re thrilled because this order will secure ice cream cones for the entire season—no more mid-August supply scrambles. But, paying €8,000 may make May feel like a black hole for profits.
That initial €8,000 outlay might look like a momentary dent in your earnings, but it’s actually a down payment on a season of financial wins. You quickly reassure yourself because you know the right way to assign costs isn’t based on payment dates but on production: the cost of each cone should be attributed to the month when those cones actually hold the ice cream!
This is because if we loaded all the costs onto May, then by July, our P&L would look like a horror movie set: expenses screaming without any revenues to calm them down. Instead, we need to spread the costs according to actual use; this way, your P&L (profit and loss statement) reflects the real situation.
Let’s sum up some key concepts:
The mantra, then, is: costs go where production goes. This not only transforms the P&L into a faithful story of your business month by month, but it keeps you firmly at the helm of your company, whether you’re navigating cones and cups or orchestrating ad campaigns.
And how does this logic apply in a project-based business? The process is the same. Let’s imagine, for example, a project that runs for four months, from September to December, with a total value of €30,000.
For this project, you need the expertise of a videomaker to create a sensational campaign!
Case A. The cost of the videomaker’s collaboration is €8,000, and she will work on the project for the entire four months alongside your in-house team.
Case B. The cost of the videomaker’s collaboration is €8,000, and she will only work on the project during the middle two months.
In this case, the logic is the same, but we need an extra step in the calculations to allocate the freelancer’s work only to the middle two months. For simplicity, we could split the cost in two (over 2 months), or, more accurately, imagine that the videomaker also works at varying percentages over those two months, just like the in-house team. Here’s a summary of the steps:
Both cases show how allocating external supplier costs correctly across distribution months lets us accurately match revenues to the right period.
Now, if everything is making sense, but these calculations have left you dizzy, don’t worry, we’ve got the solution for you: wethod. Our app handles the calculations automatically, so you can enjoy perfectly prepared reports. Like a trusty co-pilot, wethod guides you through cost allocation, providing a crystal-clear view of your financial situation, project by project. Discover how wethod can turn the maze of costs into a walk in the park. Request a demo and see how easy it is to navigate the world of numbers!
