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Lesson 3.2: Understanding Costs

Learning Objectives

By the end of this lesson, you will be able to:

– Identify all business costs accurately, even the ones you might not think count
– Calculate true profit margins using simple methods that work for any size business
– Understand the critical difference between sales money and profit money
– Use basic tools to track costs without expensive software
– Make smart pricing decisions that keep your business alive

Introduction: Why So Many South African Small Businesses Struggle

In South Africa, over 70% of small businesses close within the first few years. Whether you’re selling vegetables on the street corner, running a spaza shop, or operating from home, the biggest killer isn’t competition or lack of customers – it’s not understanding your real costs.

This lesson will show you exactly how to count every rand that goes out of your business, so you can make sure more rands come in than go out. It’s simple math, but getting it wrong destroys businesses every day.

Video Content Overview : The R8 and R10 Reality Check

The video shows a simple truth: if it costs you R8 to get a product ready to sell, and you sell it for R10, you only make R2 profit – not R10. Let’s break down where that R8 really comes from in different South African businesses:

Street Vendor Example (Selling Oranges):

– Buy 10kg oranges at market: R25
– Taxi fare to market and back: R24
– Plastic bags for customers: R3
– Spot rental/protection fee: R10
– Airtime to call supplier: R2
– Water to wash oranges: R1
– Your time (half day): R15
– Total cost for 10kg: R80 (R8 per kg)

So when you sell oranges at R10/kg, you only make R2 profit per kg, not R10!

Understanding ALL Your Business Costs

1. What You Pay to Get Your Stock

For Street Vendors

– Purchase price from wholesaler/market
– Transport to collect stock (taxi, petrol, car hire)
– Storage costs (even if it’s your garage)
– Spoilage (fruit going bad, clothes getting damaged)

For Spaza Shop Owners

– Stock purchase from cash & carry
– Delivery fees or transport costs
– Refrigeration electricity (cool drinks, frozen goods)
– Security (burglar bars, cameras, guard fees)

For Home-Based Businesses

– Raw materials (ingredients, fabric, parts)
– Tools and equipment that wear out
– Packaging materials
– Internet and airtime for orders

For Service Providers (cleaning, repairs, etc.)

– Transport to customer locations
– Materials and supplies used
– Tools and equipment maintenance
– Protective clothing/uniforms

2. Daily Running Costs That Eat Your Profit

Location Costs

– Rent (shop, market stall, storage)
– Municipal permits and licenses
– Site fees for street trading
– Security deposits

Communication Costs

– Airtime for customer calls
– WhatsApp bundles for business
– Internet for online sales
– Data for banking apps

Transport Costs

– Daily taxi fare to your business location
– Fuel if you have a vehicle
– Vehicle maintenance and repairs
– Parking fees

Utilities You Pay

– Extra electricity at home for business
– Water for cleaning/preparation
– Gas for cooking/heating

3. Hidden Costs That Kill Profits (The Ones Everyone Forgets)

Your Time Has Value

Even if you don’t pay yourself a salary yet, your time is worth something. If you could earn R50 per day doing piece work, then spending 8 hours on your business costs you R50 in opportunity.

Money Costs Money

– Bank charges for business account
– Cash deposit fees
– Card machine rental and charges
– Interest if you borrowed money for stock

Things That Go Wrong

– Customers who don’t pay (bad debt)
– Stock that gets stolen
– Products that expire or break
– Weather damage (rain on outdoor stalls)

Government and Legal Costs

– Business registration fees
– Tax payments (even small amounts add up)
– License renewals
– Legal advice when needed

Equipment That Wears Out

– Scales that break and need replacing
– Fridges that need repairs
– Tables and chairs that get damaged
– Cell phones that get lost or broken

Real South African Business Examples

Example 1: Nomsa’s Vegetable Stand

Daily Sales: R400 (seems good!)

Her Real Daily Costs

– Vegetables from market: R200
– Taxi to market: R16
– Taxi to selling spot: R12
– Spot fee to local committee: R10
– Plastic bags: R8
– Water for cleaning: R3
– Cell phone charging: R2
– Her time (8 hours at R6/hour): R48
– Total Daily Costs: R299
– Real Daily Profit: R101 (not R400!)

Monthly Reality Check

– Works 26 days/month = R101 × 26 = R2,626/month
– But this doesn’t cover:
– Sick days (no income)
– Stock spoilage
– Slow days
– Equipment replacement

Example 2: Sipho’s Spaza Shop

Monthly Sales: R15,000

His Real Monthly Costs

– Stock purchases: R9,000
– Shop rent: R800
– Electricity: R400
– Municipal license: R150
– Transport for restocking: R300
– Burglar bars payment: R200
– Till slips and bags: R100
– His salary (what he could earn elsewhere): R2,500
– Insurance: R150
– Bank charges: R80
– Total Monthly Costs: R13,680
– Real Monthly Profit: R1,320

He thought he was making R6,000 profit, but it’s really only R1,320!

Example 3: Beauty’s Catering from Home

Per Event Income: R800

Her Real Costs Per Event:
– Food ingredients: R300
– Gas for cooking: R35
– Packaging containers: R40
– Transport to deliver: R25
– Extra electricity: R15
– Water for cleaning: R10
– Airtime coordinating event: R5
– Her time (10 hours at R8/hour): R80
– Equipment wear (pots, utensils): R15
– Total Cost: R525
– Real Profit: R275 per event

She needs 3 events just to make what she thought 1 event earned!

Simple Cost Tracking for Small Business

The R5 Notebook Method

You don’t need expensive software. Use a simple exercise book with columns:

The Cell Phone Method

Most phones have a calculator and notepad:
– Take photo of every receipt
– Add amounts to running total each day
– Use voice notes to remember cash expenses

The Matchbox Method

Put a piece of paper in a matchbox. Every time you spend money:
– Write amount on paper
– Add to total at end of day
– Compare to sales for that day

Weekly Cost Review

Every Sunday, sit down and ask:
– How much did I spend this week?
– How much did I earn?
– What’s left over (real profit)?
– What cost me more than I expected?

Smart Ways to Reduce Costs (Without Hurting Quality)

Transport Savings

Combine Trips:
– Buy stock for several days at once
– Share transport with other vendors
– Walk to nearby locations when possible

Negotiate Group Rates:
– Join with neighbors for bulk taxi bookings
– Share delivery costs with other businesses
– Form buying groups for better wholesale prices

Stock Management

Buy Smart:
– Only buy what you can sell quickly
– Choose suppliers who deliver
– Negotiate payment terms (pay after you sell)
– Focus on fast-moving items with good margins

Reduce Waste:
– Check expiry dates carefully
– Store properly to prevent spoilage
– Use older stock first
– Find creative uses for damaged goods

Operating Cost Cuts

Energy Savings:
– Use LED lights (last longer, use less power)
– Unplug equipment when not needed
– Cook multiple things at once
– Use gas instead of electricity where cheaper

Communication Savings:
– Use WhatsApp instead of SMS
– Buy data bundles instead of per-MB
– Use WiFi when available
– Make calls during cheap rate periods

Pricing Your Products to Survive and Thrive

The Survival Formula

Minimum Selling Price = Total Costs + Emergency Fund + Growth Money

Emergency Fund: Add 10-20% for unexpected costs
Growth Money: Add 10-15% to reinvest in business

Example: Pricing Vetkoek

Your Costs:
– Flour, yeast, oil: R2 per vetkoek
– Gas for frying: R0.50
– Oil for serving: R0.30
– Your time: R1.00
– Packaging: R0.20
– Total Cost: R4.00

Smart Pricing:
– Cost: R4.00
– Emergency buffer (20%): R0.80
– Growth money (15%): R0.60
– Minimum selling price: R5.40

Round up to R6.00 for easy change-making.

When Customers Say “Too Expensive”

Explain Your Value:
– “I use fresh oil every day”
– “My ingredients come from the best suppliers”
– “I guarantee freshness”
– “I’m here every day, reliable service”

Don’t Compete on Price Alone:
– Offer better service
– Be more convenient
– Provide consistent quality
– Build personal relationships

Seasonal and Economic Challenges

Planning for Tough Times

During Economic Hardship

– Focus on essential items people still need
– Offer smaller portion sizes at lower prices
– Find ways to add value without adding cost
– Build customer loyalty through credit systems

Seasonal Planning

Good Months (December, school holidays):

– Save extra profit for slow periods
– Stock up on fast-moving items
– Invest in equipment or improvements

Slow Months (January, mid-winter):

– Reduce stock levels
– Focus on essentials
– Consider different products/services
– Use time for planning and relationships

Dealing with Load Shedding

Cost Impact Planning:

– Calculate lost sales during power cuts
– Budget for generator fuel or backup power
– Account for spoiled refrigerated goods
– Plan alternative cooking/operating methods

Adaptation Costs:

– Battery-powered equipment
– Gas alternatives to electricity
– Better insulation for cold storage
– Solar power for basic needs

Understanding Profit vs. Cash Flow

The Dangerous Difference

High Sales Don’t Mean High Profit

– You might be selling at a loss
– Costs might be higher than you realize
– Cash in hand doesn’t equal profit

Cash Flow Problems

– Money tied up in unsold stock
– Customers who buy on credit
– Seasonal sales patterns
– Large occasional expenses

Monthly Profit Check

Simple Monthly Review

1. Add up all money received: R_____
2. Add up all money spent: R_____
3. Subtract: Profit = R_____
4. Ask: Is this enough to live on and grow?

Red Flags

– Working harder but profit stays the same
– Constantly borrowing money for stock
– Can’t afford to replace equipment
– Personal living expenses increasing but profit isn’t

Building Cost Awareness Habits

Daily Habits

Morning Planning:

– Count yesterday’s profit
– Plan today’s spending
– Set daily profit target

Evening Review:

– Record all expenses
– Calculate day’s real profit
– Note what cost more than expected

Weekly Habits

Sunday Business Review:

– Calculate week’s total costs
– Compare to sales
– Plan next week’s budget
– Identify biggest expense categories

Monthly Habits

Month-End Analysis:

– Review all cost categories
– Compare to previous months
– Adjust pricing if needed
– Plan cost reduction strategies

Getting Help with Costs

Free Resources

SEDA (Small Enterprise Development Agency):

– Free business training workshops
– Basic accounting help
– Business plan assistance
– Mentorship programs

Local Municipality:

– Information on permits and licenses
– Small business development programs
– Market stall rental information

NGOs and Community Organizations:

– Microfinance institutions
– Business skills training
– Cooperative formation help

Simple Accounting Help

What to Track:

– Every rand in (sales)
– Every rand out (costs)
– What you owe others
– What others owe you
– Equipment and assets

When to Get Professional Help:

– Business growing beyond your tracking ability
– Tax complications
– Wanting to get business loan
– Considering partnerships

Case Studies: Real South African Success Stories

Case Study 1: Mandla’s Mobile Phone Repair

Starting Situation:
– Fixing phones from home
– Charging R50 per repair
– Thought he was making good money

Cost Reality Check:
– Transport to get parts: R15
– Parts cost: R25
– Tools wearing out: R5
– Electricity: R3
– His time (2 hours): R20
– Total cost: R68
– Loss per repair: R18!

Solution:
– Raised prices to R120
– Negotiated wholesale parts prices
– Bought tools in bulk to reduce per-job cost
– New profit per repair: R35

Result: Now earning R7,000/month instead of losing money

Case Study 2: Precious’s Catering Cooperative

Starting Problem:
Five women cooking together but losing money on every job

Cost Issues Found:
– Each woman calculating costs differently
– Not including transport to events
– Forgetting about equipment replacement
– Underpricing to get customers

Group Solution:
– Shared cost tracking system
– Bulk buying to reduce ingredient costs
– Proper pricing formula including all costs
– Marketing focus on quality, not low prices

Results:
– Individual monthly income increased from R800 to R2,400
– Business sustainable and growing
– Able to save money for equipment upgrades

Case Study 3: Joseph’s Fruit and Vegetable Delivery

Innovation:
Realized his transport costs could be an opportunity

Smart Cost Management:
– Calculated exact cost per kilometer
– Planned efficient delivery routes
– Charged customers fairly for convenience
– Used motorcycle instead of taxi for restocking

Pricing Strategy:
– Market price + R2 delivery fee
– Minimum order to make delivery profitable
– Regular customers get loyalty discounts
– Premium service for busy customers

Success Factors:
– Understood his costs completely
– Turned cost (transport) into service offering
– Built business around convenience, not lowest price

Technology for Small Business Cost Tracking

Using Your Cell Phone

Free Apps That Help:
– Calculator with memory function
– Voice recorder for expense notes
– Camera for receipt photos
– Basic spreadsheet apps

WhatsApp for Business:
– Send yourself expense updates
– Photo receipts to yourself
– Voice note daily totals
– Create groups with other vendors to share tips

Simple Spreadsheet on Phone

Basic columns you need:
– Date
– What you spent money on
– How much
– Which product/service it’s for
– Running total

Weekly totals:
– Add up all expenses
– Compare to all sales
– Calculate profit percentage

Banking Apps for Tracking

If you have a business bank account:
– Check balance daily
– Review all transactions weekly
– Use categories to sort expenses
– Set up alerts for low balances

Understanding Taxes and Legal Costs

When Your Business Must Register

Turnover Tax Threshold:

– If you earn less than R1 million per year, you can register as a micro business
– Pay turnover tax instead of income tax
– Simpler record-keeping requirements

What This Means for Costs:

– Must keep basic records
– Set aside money for tax (1-3% of turnover)
– Factor tax into profit calculations

Informal Business Costs

Even if not registered, you have costs:

– Trading permits where required
– Health certificates for food businesses
– Insurance for equipment and stock
– Site fees for market stalls

Planning for Formalization:

– As business grows, registration becomes necessary
– Budget for increased compliance costs
– Understand benefits (bank accounts, contracts, growth opportunities)

Building Financial Discipline

The Profit First Method (Simplified)

Every time money comes in:

1. Pay yourself (living expenses): 50%
2. Save for costs (stock, supplies): 30%
3. Save for taxes and licenses: 10%
4. Save for growth/emergencies: 10%

Adjust percentages as business grows:

– Start with survival (higher personal %)
– Move toward growth (higher business %)
– Always save something for emergencies

Avoiding Common Money Traps

Don’t Mix Business and Personal Money:

– Keep separate containers/accounts
– Pay yourself a regular amount
– Don’t use business money for personal emergencies

Don’t Ignore Small Amounts:

– R5 here, R10 there adds up quickly
– Small leaks sink big ships
– Track everything, even tiny expenses

Don’t Borrow for Operating Costs:

– If you need loans for daily expenses, business isn’t profitable
– Fix cost problems before borrowing
– Use loans for equipment/growth, not survival

Remember: Small changes in cost management can mean the difference between a business that survives and one that thrives. Start today, even if it’s just writing expenses in a notebook. Your future self will thank you!