The Guide to Operating a Trading Company: Calculations

Now that you know everything about sourcing products and outgoing freight, you'd better figure how to price your product to generate profit. And there's no magic formula. You need to precisely determine what will be your costs, how much each sale makes you earn, and some other details.

In this article, I've put together everything I learned to help you make accurate calculations and financial models for your trading business. If you're not good at maths, I got you covered. I'll tell you exactly what you should include within your financial simulations.

Ready, set, calculate.

The Calculations to Operate a Trading Company

These are, necessarily, all the elements you should integrate within your calculations:

1. Spare yourself, get rid of VAT: Unless you sell products on a B2B basis, you must realize that there's a huge difference between retail price, and what goes into your pockets. Let's say that your tax-free price is $100, and VAT is 20%. Then your retail price becomes $120. But when you sell a product at $120, what do you earn exactly? You earn $100 because, in the end, the extra $20 are paid to the government. As a result, always calculate and discuss prices using tax-free amounts.

2. Get rid of inbound and outbound logistics cost: How much does it cost to bring one unit of your product from your supplier to your warehouse? How much does it cost to bring one unit of your product from your warehouse to your customer? In other words, you have to measure how expensive it is to move your product from one place to another. Usually, working with only one warehouse, there's a cost associated with inbound logistics (bulk shipping from the supplier to your warehouse), and outbound logistics (unit shipping from your warehouse to your customer). If you have multiple warehouses, you have to determine what are your flows, and how much they cost.

3. Get rid of manufacturing costs: An easy one. How much does it cost to produce one unit of your product? Without even considering shipping and packaging. Most importantly, is your manufacturing process subject to variations? Let's say that your product is made of gold. If the price of gold changes, does it heavily impact your manufacturing costs? Think beyond the product, think about the commodities.

4. Spare yourself once again, get rid of marketing costs: How much does it cost to advertise your product? Most importantly, what's your cost of conversion? What's your conversion rate? What's your cost of acquisition? Making a product, in itself, is hard. But it's only one side of the medal. On the other side, you have to sell it. And these costs quickly get high, so don't forget them.

5. Be realistic, assume there will be returns and defects: Your product is and will never be perfect. Every single product on this planet has flaws, manufacturing issues, physical defects, and other problems that come with shipping and warehousing. Integrate that cost into your calculations. For instance, assume there's a 2% return rate and make your financial simulations more accurate.

6. Take care of certificates and regulations: If your product involves specific fields like medicine, electronics, indoor equipment, etc, you'll certainly have to pay labs to make it tested and certified. That's a cost your supplier can cover, but most of the time it will be on you. As a result, find out how much it costs to hire a lab to validate your products towards law.

Make sure you do not forget any single point. Let's move on to several tips that will help you be more accurate, and better assess your model.

Tips to Make Your Estimations Safe and Accurate

While making simulations and models for my business, this is what I learned:

• Always take the worst-case scenario: Make all your calculations and predictions by considering that you're always in the worst-case scenario. Assume your price is low, your costs are huge, and your marketing budget is high. That will help you envision what's happening when your success conditions aren't met.

• Bulk means cheap: Ask multiples quotes from your supplier. The more you order, the cheaper the price per unit. In the end, it might be less expensive to order twice as much, so think about it.

• Don't forget VAT: Most beginners will fail to account for VAT within their calculations. Please, don't forget it. Taking 20% off your business in the blink of an eye is everything but funny.

• Don't forget humans: At every stage of the process, there are humans. This article goes about everything that's revolving around your product, but don't forget that you'll certainly have to hire people all along. And that goes into your fixed costs.

• Time is money: The whole setup of your trading business has a cost. Developing a product has a cost. Finding a logistics partner has a cost. All in all, everything that takes time has a cost. Your own personal time as well. That's why "optimization" really is the keyword that summarizes what a trading business is all about.

Additional Resources

These articles might come handy:

• The Guide to Operating a Trading Company: Outgoing Freight

• The Guide to Operating a Trading Company: Sourcing Products

• Planning Poker: One Tool to Better Estimate Task Durations

• Business Basics: How to Price Your Product or Service