There are a few different ways that you are probably familiar with for tracking and managing your actual cost of goods, with some being more exact than others. Maybe you calculate everything manually, or maybe you’re adding the same markup percentage across the board to cover all the factors that go into getting the product into your inventory (your landed costs). Maybe you have software in place that works for you, that gets the job done and gives you a number you’re happy with – but is that number accurate? So, now you’re wondering what you can do to improve your odds and give you the best and most accurate result. Good, because we are about to tell you.
First, whether you are aware of it or not, it is important to bring you up to speed with “Landed Costs”. Landed costs are the total cost of a product, or inventory item once it has arrived at your facility. This means it includes the original purchase price of the item, the shipping costs, customs, duties, taxes, and really any fees that are incurred during the process of getting the item from the seller to the buyer. If you are not tracking your landed costs, then you are most likely losing money as a business, and that is something that you will want to fix. It is impossible to know the true valuation of your inventory without tracking landed costs.
Manual tracking of landed costs is a viable solution, though it can end up being extremely time consuming and allows for plenty of errors when attempting to figure out the true landed costs associated with each unit received. These errors can end up causing you to lose money if you’re marking-up a product without having an accurate idea of all the Landed Costs. That’s something we are trying to avoid. The less manual processes here, the better.
Some companies may find they have had good results by adding an average mark-up across the board, on all their products to cover the incurred fees/costs, a tactic that is ultimately better than nothing, though it is still not giving the accurate numbers that you as a company need to be looking for. Instead, the best and most accurate way to track your landed costs is with landed cost tracking software such as Blue Link that uses estimates (assuming you’re unable to get actual costs at the time you receive the shipment of goods). You will then need to review these estimates on a regular basis for accuracy.
Problem: Are you calculating your landed costs based on poor estimates?
In order to give a better understanding of what this might look like in action, let’s try to build a scenario using Company A and take a look at how a company might be incorrectly calculating their landed costs based on poor estimates. Let’s say Company A imports product directly from manufacturers overseas. Because they may only receive an invoice for freight, customs, etc. weeks after receiving the goods, they base their landed costs on an estimate of previously associated fees, for example, how much it cost the company to import the product 6 months ago. But, if Company A is not regularly comparing these estimates with actuals, they could be losing money. If Company A does not accurately track their true cost of goods, they will be expecting a higher return of profit on the sale of the imported goods, but once the true cost becomes apparent, their large profits will disappear. If Company A imports goods for $100 and sells for $125, they’ve made a quick $25 dollar profit. Seems great, right? Once you factor in the true landed costs that they overlooked by not correctly estimating, for example, $15 in duty charges, $10 in brokerage, and $10 in freight costs – well, you’ve lost money. Using wildly inaccurate estimates and not very fine-tuned numbers that closely resemble your true landed costs, Company A is doing a massive disservice to itself.
Solution: Continuously review and update landed cost estimates as necessary
With Blue Link, the difference between the estimate and actual freight bill (the variance) is treated as an expense if it is a small and insignificant amount – which if you estimate correctly, it should be. If you’re dealing with a large variance, it’s time to take another look at how you got your estimates. Some businesses want their ERP software to let them change the inventory value to account for these large variances, however, the better practice is to accurately track your landed costs, so that the variance is never large – because the more accurate you are with your estimates, the better. Therefore, it is best practice to continuously review and update landed cost estimates as necessary. Don’t be afraid to get on the phone with your freight forwarder or customs broker to get an idea of how they calculate costs. The idea is that your cost estimates should never be too far from actual costs, which means you can easily use these estimates in setting prices. Especially since you may not receive your actual freight or customs bill until long after you’ve sold the product. Blue Link will let you manually adjust your inventory value, but it’s purposefully a manual process to dissuade people from doing this, as the automated features using estimates to account for landed costs are a much more efficient option. The better you know your true costs of goods, the better your business will operate, and the more money you will save and earn.