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Costing and Pricing
Judith Harrison FCCA DipChA
Manager of VAS’s Community Accountancy
& Payroll Service
How do organisations look at costs?
What needs to be priced in?
How do you demonstrate added value?
Value for money?
How to ‘ compete’ for price?
Full cost recovery.
What do we need to include in a financial plan for an organisation involved in Commissioning?Just the normal financial planning issues which all
organisations face, put simply all you have to do is:
• Make a financial plan
• Know what steps you can take if things don’t go according to plan
• Measure what actually happens against the plan
• Take corrective action as required
The grant funding model has its challenges, but;
• Cash flow is predictable, some groups we deal with don’t even bother preparing cash flow forecasts or doing detailed budgets
• Often cash is received in advance so there is no need to raise working capital
• No need to allocate staff time to raising a large volume of invoices or to carry out credit control
Now you need to forecast your finances
• Many Charities have had experience of producing a 1 year budget but you will now have to develop budgets covering say 3 years as you need to plan ahead
• There are VAS courses in budgeting & cash flow forecasting, & I can provide an Excel templates
• At this stage you will need to make a number of assumptions about
– The level of demand for your services
– The price you will be able to charge for your services
– Remember it is an iterative process;
Top tip – make excel your friend! (VAS runs courses)
What is the full cost of providing your service(s)?
• Historically, funders may have been loathe to fully fund services (e.g. 10% added towards funding overheads)
• You have to leave this behind, as you need to do a proper FCR calculation which allocates ALL your organisation’s costs to its services
• These calculations can be simple or complex, depending on the number of services you deliver
Top Tip try to keep them as simple as possible
What is the full cost of providing your service(s)?
• We need to understand the difference between fixed costs and variable costs
• Fixed costs tend not to change with the level of activity, often they relate to overhead costs
• Variable costs do vary with the level of activity, you may describe them as ‘project’ costs
What is the full cost of providing your service(s)?
• All this tells us is how much the service costs us
• We are now at Full Cost Recognition!
• The challenge is how to cover the costs of the service PLUS a contribution to reserves
• Why do we need a contribution to reserves?
Top Tip – It is not unreasonable to have reserves!
An example
Users 10 15 25 30 35
Salaries (Fixed Cost) 25,000
Room Hire (Variable Cost)
1,000
Total Cost 26,000
Unit cost 2,600
Marginal Cost
Day Centre Costs
An example
Users 10 15 20 25 30
Salaries (Fixed Cost) 25,000 25,000
Room Hire (Variable Cost)
1,000 1,500
Total Cost 26,000 26,500
Unit cost 2,600 1,767
Marginal Cost 100
Day Centre Costs
An example
Users 10 15 20 25 30
Salaries (Fixed Cost) 25,000 25,000 25,000
Room Hire (Variable Cost)
1,000 1,500 2,000
Total Cost 26,000 26,500 27,000
Unit cost 2,600 1,767 1,350
Marginal Cost 100 100
Day Centre Costs
An example
Users 10 15 20 25 30
Salaries (Fixed Cost) 25,000 25,000 25,000 25,000
Room Hire (Variable Cost)
1,000 1,500 2,000 2,500
Total Cost 26,000 26,500 27,000 27,500
Unit cost 2,600 1,767 1,350 1,100
Marginal Cost 100 100 100
Day Centre Costs
An example
Users 10 15 20 25 30
Salaries (Fixed Cost) 25,000 25,000 25,000 25,000 50,000
Room Hire (Variable Cost)
1,000 1,500 2,000 2,500 3,000
Total Cost 26,000 26,500 27,000 27,500 53,000
Unit cost 2,600 1,767 1,350 1,100 1,767
Marginal Cost 100 100 100 5,100
Day Centre Costs
Pricing your service(s)?
• This may well be a whole new world for charity trustees/managers
• In order to set a realistic price for a product or a service you need to consider information about;
– The costs of a service/product, which are direct costs & which are variable costs? (see Day Centre example)
– The market for your service, are you Tescos or are you Waitrose?
– Your competitors
– The demand for your service
Remember Pricing is an art, not a science
Start by itemising the cost of a typical job, including a mark-up
• Base this on your FCR calculation
• Remember some costs are fixed, some are variable
• So to calculate the cost of an individual ‘job’ you will have to make an assumption about how many jobs you can
– A) Supply
– B) Sell
Break even
• You need to know at what level you ‘break-eve
Marginal costingVs
Absorption Costing
How much of your service can you sell? Example
• Frasier is a full time counsellor for a mental health charity, he is employed for 35 hours per week for 52 weeks of the year
• This totals 1,820 hours per year
• However after taking into account;
– Holidays
– Sick leave
– Training & Admin
• Frasier is able to provide 1,145 of chargeable hours, i.e. 63%
Top Tip - Be very careful of your assumptions about how many “units” you can deliver.
But will our customers be willing to pay this price?
We may need to do some market research at this stage;• Help Yourself Directory• Your National body• Talk to your customers
Top Tip it is very difficult to change customers perception of what is a fair price for your services
Know your market - Why does the customer value your service?
The customers perception of the value of your service will be influenced by;
• Your level of specialised knowledge• Experience of staff• Their empathy with service users problems &
challenges
Pricing Strategies – what are the merits of;
1. Pricing a new product/service at a loss in order to win work from competitors
2. Charging a premium for your unique product/specialised skills
3. Charging a low price to ensure your product/services are accessible to all who may need them
4. Setting a price equal to the FCR rate
5. Setting a price high enough to cover all possible cost increases
Differential pricing
• Remember it may be justifiable to charge different types of customer different prices
• For example you may charge more for training courses delivered to a government body compared with those delivered to a small VCO
We can now produce a cash flow forecast – Why?
• Early recognition is vital as you then have time to take preventative action
• Suggestions for dealing with deficits?
Top Tip I would suggest that an organisation always prepares a 12 month rolling cash flow forecast - don’t just do them as part of your budgeting cycle.
NB VAS can provide training & templates for producing cash flow
forecasts
Re-do everything!
Probably at this stage (especially if your organisation is
new to this process) you will need to do versions 2,3,4,
etc of your plans.
Remember, additional time spent building dynamic
worksheets could pay off now as you will be able to
model different scenarios
What if?
You now have a plan which includes reasonable assumptions & which seems workable, so now is the time to consider what happens if?
• Demand is less than you hoped• You have to decrease your prices• The cost of the service increases• You have a high level of bad debts
How can you be sure you send out an invoice for every job & that all your
customers pay?
• Most grant funded charities do not need to operate a sales ledger because income tends to come into the organisation in a small number of high value transactions
• If an organisation has a high volume of lower value transactions it is more efficient for them to operate a sales ledger as part of their accounting system
Measure actual performance against the plan
The dreaded management accounts
• As pithy & to the point as possible, KPIs
• Only report on what is important
• Quarterly or monthly?
Take Corrective Action as necessary
