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August 26, 2016

Determining Your Costs

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August 2016
What does it take to determine your costs?
It's hard to believe the summer is rapidly coming to a close. Students are heading back to college, and kids are starting their next grade level. It seems that, in the candle business, we are always in school learning new things, and new questions always arise.

A big part of this is because, as a candle maker, you have to wear many hats and learn to be an expert in many aspects of a business. One day, you find yourself trying to be a chemist, figuring out how a wax performs with a fragrance or wondering if you should consider using a new wax or modify an existing formula.

The next day, you're trying to be a perfumer, keeping up with the latest trends in new fragrances. To stay on top of the candle market, you need to keep adding new fragrances. The following day, you're filling the role of a production manager, trying to figure out how to make more candles in a day. I am convinced that, with all of these duties, it had to be a candle maker who developed the saying, "burning the candle at both ends."

With all of the above functions needing to be performed, it is understandable that many people do not spend enough time developing a sound pricing structure for their products. In this edition of the Enlightner, we will help you understand all of the costs associated with this process. The actual selling price and the profit you wish to make are influenced by other factors that vary from business to business.

Understanding all of your costs is very important. As things change in the economy, you must consistently measure them against your processes and costs. Are lower fuel prices able to help you save anything? If so, and you're delivering your candles, can you pass that savings on to the customer? Has the cost of your raw materials increased? Did you have to increase the scent load for a particular customer?

The question many people ask is, "Where do I start?" The first step is to calculate ALL of your costs. If you have access to a spreadsheet, begin to list all of these costs and keep them up-to-date so you can track potential pricing issues early in the process. We recommend that you work closely with your accountant on this project to be sure you have identified all of your expenses.
Variable Candle Making Costs
When you have a candle making business, there is the obvious cost of your waxes, fragrances, wicks, containers and color. You should also include in these costs a calculation for the cost of inbound freight. Over the years, freight costs have continued to increase and must be accounted for. These items represent the larger portion of your variable costs, but there are many other smaller expenses that you may not have considered. These include, but are not limited to, the labels you use (as you may have found, four-color labels can be expensive) and the carton and/or packing material used to ship your candles. Also, did you run out of a component and need special, overnight shipping to finish the project? Be sure to reflect this in your costs. The above expenses also are referred to as your "cost of goods," and they will change based on how many candles you produce.
Fixed Candle Making Costs
The next category is your fixed cost or what is commonly called "overhead." This category includes rent, utilities, labor, insurance, advertising, credit card fees, catalogs, advertising and many others that may or may not exist with all candle companies. For those that run their business in a home, garage or basement, identifying fixed costs may be difficult. However, be sure not to shortchange these costs, because, if you elect to set up an operation outside of the home, it is hard to absorb all of these costs in your cost structure.

If you are the only employee, then be sure to add a cost for your labor. Again, do not underestimate this charge, because it will not help in the long run. When identifying your labor cost, be sure to calculate time spent picking up items, running to the post office or UPS store or anything else that takes you away from other activities.

Identifying all of your fixed costs can be difficult, especially with utility costs that change based on cold winters and hot summers, the cost of snow removal and other costs. However, be sure you are charging enough. You need to get as close as possible to these actual, overhead costs.
Incidental Candle Making Costs
The final category is incidental cost or what I would call the "cost of doing business." These costs are much more difficult to identify, especially for start-up companies. Typically, these include, but are not limited to, returns, promotions, testing of new products, trade show costs, samples sent to customers, donations to non-profits, and other costs that may not fit into the above two categories.

Unfortunately, it is not an easy task to put your hands on all of your costs, but, if you elect to sell candles, it is important to understand how all these costs can have an impact on your business. There is not a set formula for each candle company, because everyone's circumstances are completely different.
CHANDLER'S CORNER
Why do I sometimes get different results in my finished candles when I think I am doing the same thing?
Hi. I'm Chandler. I tell customers that the process of candle making can be as important as the components that go into the candles. Some of the key processes to follow: Make sure your temperatures are consistent across your batches in terms of both room temperature and pouring temperature. Pouring a candle at even 10⁰F lower can result in differences in your candles. When measuring your fragrances and additives, do everything by weight. Using measuring spoons and cups can result in different fill levels, thus different fragrance amounts being added to the wax. If you're pouring container candles, make sure your containers are all stored in the same manner. During the winter, if you store jars in an unheated area, you should have a plan that allows them to adjust to the same temperature as the jars you filled during the summer months. I frequently tell customers who are just starting their businesses to take the time to keep detailed notes during their testing process so that, when they find results they like, they are able to repeat them.
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