If you missed last week’s blog on fixed expenses, you can read it here.
Knowing your variable expenses is extremely valuable. It lets you know exactly what you’re putting into your products and services. In turn, that leads to easier decisions on pricing, easy goal calculations, and confidence in what you’re charging.
What are variable expenses? They are the fluctuating expenses in your business. The cost of adding one more hour to a service or one more hat to a hat order.
Some examples are the cost of material to build a product, mileage to and from a job site, the hourly wage of your employees who complete your services, and even your taxes.
Variable expenses might fluctuate with the size of an order, for example when your cost goes down for ordering in bulk.
You have a cleaning business, and you have two employees who go out and do the cleaning while you work in the office. Your variable expenses for one job might look something like this:
Hourly rate per employee: $15
Vacation pay per employee: $.32 per hour
Mileage rate: $.54 per mile
Cleaning products: $1.22 per hour (avg)
Servicing vacuum cleaner: $2 per hour (avg)
Some of these are really easy to calculate. The hourly rate you pay your employees is easy, since it’s set. Same with the mileage.
Calculating how much it costs for the vacuum cleaner servicing and the cleaning products is more complicated. To get that number, take the cost for the year and divide it by the number of hours you billed for the year. If you don’t have that information yet, you can guess. Make sure to update your estimates once you’ve been in business for a bit.
If you add up these expenses it works out to $18.54 per hour in variable expenses, plus travel. Since travel is calculated per job you’ll have to add it up by the distance and divide it by the number of hours your employees are spending at the job. Alternatively you can take the average mileage per hour for past jobs and add it to your hourly rate for a rough idea.
Print out your last few months of bank and credit card statements and go through them looking for variable expenses. Write them all down and add them up. Then calculate the number of hours you billed over the same period. Divide your variable expenses by the hours you billed to get your average variable cost per hour.
Don’t miss the rest of the budget for your business series: