Today we're going to start to think about Costs and Expenses, and it's a biggy!
In my experience, very few business take into account ALL their expenses when thinking about pricing. But when you're small and new, and just setting up, if you don't know exactly what counts, you can make big mistakes that very quickly mean that any hope of making a profit vanishes.
So what's the different between a Cost and an Expense.?
“Cost is short for Cost of Sale. This is something that has to be bought in to allow your product (flowers) be sold”
“An Expense, is an item that is needed to run the business. ”
For UK Business accounting purposes and tax, they are both taken together as Allowable Business Expenses
HMRC (Her Majesty's Revenue and Customs) have very clear notes about what is to be taken into account whether you are a sole trader or a limited company on their website here their information and advice is presented in plain English, and is easy to read, so do have a quick read through (and it will help you with the next 2 sections).
The majority of people following this course will be Self Employed Sole Traders, which is how my business is currently set up (I have been a limited company in the past), so please do double check if you are a limited company because some expenses are slightly different. (please note, if you are not in the UK, please check your local authority)
Your Cost of Sales are all the things that you have to buy in to be able to sell your end product
If you want to grow a plant, you have to buy a seed
If you want to pick flowers, you will have to pay for labour to get them picked (yes, even if you pick them, you will need to account for your time and labour)
If you want a plant to have grown well you will need compost/fertiliser/water
TASK
Before you move onto the next section, spend 5 minutes listing all the things that you you think you need to buy to be able to sell.
How many cost of sales items can you see in this picture?
So what did you get on your list?
Here's what I divide my cost of sales list into:
Bulbs- Spring bulbs, Narcissus, Tulips, Alliums, Anemones and Ranunculus, plus summer Dahlias and Gladioli. These can often be large numbers and high costs, and need to be ordered in January and July.
Seeds - The 2nd year I grew flowers I used 18 different seed companies, which all involved postage costs, now thankfully there are a couple of wholesale companies that do larger numbers of varieties suitable for cut flower growing.
Plants - Shrubs, herbs and perennials that I’m not growing from seeds.
Flowers - anyone who sells retail may need to buy in from other suppliers at pinch points in the year, these are a cost of sales.
Floristry sundries - Buckets, scissors, vases, paper or tissue floral wrap, wires and tapes, gift cards.
Small tools - secateurs, trugs, hoes, forks, wheelbarrows, seed trays, pots.
Material purchases - Compost, netting, environmesh, vermiculite.
Salary and contractors - help with floristry or farming or deliveries or admin and accounts in whatever form.
Workshop cost of sales - I separate this one off, so that I have a clear idea of the costs, which include refreshments, staff help, flowers either bought in or grown by us, plus tools and sundries needed specifically for workshops.
Do you know the prices of them all?
TASK
Take the Quiz and test yourself.
Print off the sheet, and guesstimate the prices, then go online or to your receipts and properly look them all up. How correct were you? or far out? More than 10% difference could mean all your profit disappears.
Prices may change for some things around the country and later in the course we'll also look at other ways to save money. All of these things need to be taken into account when pricing your flowers.
Expenses
Expenses are Money Spent or cost incurred in an organisation's efforts to generate revenue
Capital expenses are usually larger items that are needed to set up a business, or expand it when it's going. Examples for those of us growing and selling flowers are
Polytunnels or glasshouses
Land
Sales buildings (even if it’s just a garden shed)
Storage
Delivery vehicles
Mowers and power equipment
If you are using a lot of items that are in this category, then it may be best for you to set up your business as a limited company. This is the limit of advice that I'm able to give on this subject, please do check with an accountant.
Other expenses, which may be one offs or ongoing expenses are
Insurance (Public liability is essential, Employers liability if it’s more than just you)
Accountancy fees, either for your accountant or book keeper, or an online accounting programme like Quickbooks or Sage
Rent, Utility bills (Water, gas, electric) and Security
Advertising, including website costs, photography, free samples, business cards
Computer and software, (Don’t forget your web hosting, dropbox, canvas etc)
Accommodation and Subsistence, (going to a Flower growers’ conference - look up what you can claim as expenses)
Bank, credit card and PayPal fees
Rates and water
Telephone (don’t forget to work out your percentage for personal use)
Travel costs or Vehicle running costs (Either the bills for your vehicle or a flat rate mileage)
Printing, Postage and Stationary - diary, paper, pens.
Working from home expenses HMRC guidelines here
Legal professional fees (any lawyers/coaches/designers come here)
Training costs - be careful what counts here, CPD for a current business is valid, training to do something in a new isn’t.
Safety equipment and branded work wear. Clothing branded with your company name that you can't wear outside the workplace for you and your staff, is an allowable expense.
Expenses can get expensive very quickly…. and all of these things need to be paid for by selling your flowers. It’s easy to be seduced by spending more money than you NEED to when you are setting up your business, but keeping a clear view of what needs to be spent each year, - and how much that means you need to bring in turnover is the aim of this course.
If you don’t yet have a system set up to record expenses, then here are the spreadsheet headings that I used for the first 10 years of my self employment.
Expenses are also going to need to be taken into account when pricing up. If your expenses over the year are £6000, then each month you will have to take £500 , or each week £125 or a set price for each item that you sell - depending on the number each year, in addition to your costs of sales- which include labour for your time to ensure you have everything paid for.