Landed Cost Definition
First, it is important to bring you up to speed on “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.
Calculating Landed Cost
To calculate a landed cost you must use three main elements: the actual cost of the goods; transportation and insurance; and other government fees assessed on the goods. It’s easy to sell products at a loss when you don’t know what it costs to get them to you in the first place.
Check out the formula here: Landed Cost Formula (Calculation) | How to Track Landed Costs
Managing Landed Cost
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.
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.
Many people confuse this with covering general business expenses, but costs such as rent and wages would exist anyway. However, the only reason you paid those duty, brokerage and freight costs was to get the product into your warehouse so you could sell it. Therefore, if you don’t cover those costs in your selling price, you’d be better off not having purchased it at all.
The advanced automation capabilities that have emerged with the convergence and streamlining of technology and accounting have helped businesses like yours expand cross-border shipping.
However, with this opportunity comes stricter accounting regulations and increased competition. Now more than ever, businesses are relying on all-in-one accounting and inventory management systems to deal with the rapidly changing regulations, trade agreements and true costs of goods that are associated with cross-border shipping.
The old ‘will do’ accounting systems are simply too limiting to deal effectively with these new complicated accounting realities.
Fortunately, software companies have developed cost-effective enterprise resource planning (ERP) systems, specifically for your mid-size business to address some of these advanced accounting needs, such as tracking of inventory costs.
5 Benefits of Managing Landed Costs
|Better Time Management||Spend less time dealing with administrative tasks and spend more time selling your product and managing your customer relationships.|
|Improve Cash Flow||Your inventory costs are accurately calculated, releasing cash flow, lowering borrowing costs, and allowing for growth potential.|
|Increase Sales||Your sales team gets access to accurate information about products and makes fewer errors when creating orders and quoting costs, building better relationships with customers.|
|Cost Savings||Know the true costs of your inventory items in order to save costs and set the right margins.|
|Reduce Employee Costs||With the right system to help automate and streamline processes, your businesses can expand without adding human resources.|
Why You Must Track Landed Costs Accurately
You may only receive an invoice for freight, customs, etc. weeks after receiving the goods 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. Not regularly comparing these estimates with actuals, could be losing you money.
Let's say you imports goods for $100 and sells for $125, then you've made a quick $25 dollar profit. Seems great, right? Once you factor in the true landed costs that are overlooked by not correctly estimating, for example, if you paid $12 in duty, $5 in brokerage and $9 in freight costs to get the product, did you still make money on it?
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.