The cost of running a business is often discussed in terms of intangible factors such as time, effort and creativity. While these aspects are certainly important, it is also necessary to consider the tangible costs associated with running a business. Tangible costs refer to expenses such as supplies, taxes, wages, rent and utilities that must be paid to keep a business running. Without an accurate understanding of these costs, it is impossible to accurately budget, plan and manage a business. By understanding the tangible costs of running a business, organizations can be better equipped to make informed decisions and allocate resources in a manner that is most effective and efficient. In this blog post, we will be exploring the tangible cost associated with running a business and how they can best be managed.
IT Tangible Costs and Benefits
Benefits of tangible costs
A company can benefit greatly from tangible costs, both in terms of the practical production they enable and in terms of the accurate analysis they enable. Benefits of tangible costs at a company include:
Performance enhancement
Practically speaking, tangible costs frequently have a direct impact on output within an organization. Spending on employee salaries, for instance, enables you to receive the output of your employees, while spending on supplies and equipment enables you to produce the goods or services that you sell to consumers. Effective spending on tangible costs results in a net profit for the business because it brings in more new revenue than it costs to do so.
Reduced accounting uncertainty
Tangible costs may be simpler to manage in your organization’s financial records because you can precisely quantify them. You can determine the exact cost to the company by dividing your spending on employee compensation, for instance, by the sum of all salaries and benefits that the company pays for. This helps to keep your books accurate and balanced.
Improved projections
When making projections, the increased certainty that tangible costs offer is also advantageous. You can apply precise values for the rise or fall in spending on a specific cost when thinking about changing company procedures that necessitate an update to tangible costs. You might be able to more accurately project updates to spending under a proposal by not estimating the expected cost as you would for an intangible cost.
What is a tangible cost?
A project’s resource or asset costs can be measured quantitatively and are referred to as “tangible costs.” A project’s spending on tangible costs can include a wide range of expenses, such as supply costs, equipment maintenance, and employee salaries. When you include a tangible cost in a budget report or plan, you can calculate it directly without having to provide a precise value in place of an estimate.
Tangible vs intangible costs
There may be both tangible and intangible costs involved with your choice when creating a proposal or thinking about a business decision. Tangible costs are those that have a clear, quantifiable value, such as the salary required to hire a new employee. The impact of intangible costs, which lack a direct monetary cost and are challenging to precisely quantify, can include lost productivity from a position when a new employee is hired while they adjust to the demands and expectations.
It’s important to weigh both the immediate and long-term costs of various options when making decisions. This gives you the information you need to make the best decision possible and might increase your likelihood of selecting the more advantageous choice.
Tangible cost examples
It’s crucial to comprehend tangible costs and how to apply them to your financial records when managing your company’s finances. These illustrations can assist you in comprehending the various tangible costs you might incur and how a business evaluates those tangible costs when making business decisions:
Tangible costs in a manufacturing process
Wood furniture kits are made by a furniture manufacturer and sold directly to consumers. The business must purchase raw lumber, process it, and cut it into the required pieces for each construction set in order to assemble the kits it sells. Each set of lumber is then packaged by the business and shipped to customers who place orders through an online store. The business incurs numerous real costs during this process, and each is taken into account when determining whether a furniture set will be profitable.
The company calculates a variety of tangible costs for each kit it sells. The business first calculates the cost of the raw materials needed and the machinery needed to prepare the wood for each kit. Every kit sold also includes the costs of packaging, shipping, fuel, and driver compensation through the company’s distribution network. To determine profitability, the company compares these total tangible costs for each kit to the revenue it generates.
Tangible costs for a sales operation
A business employs a group of sales representatives who approach potential customers directly to promote the company’s products. Each worker has a personal workspace with a desk, chair, computer, phone, and standard office supplies. The company’s sales team works with a list of prospective leads that was acquired from a research consultant.
The business must make adjustments to each of these tangible costs if it wants to increase the size of its sales force. The new employee needs their own pay and a full set of tools. The business will also expand their lead purchasing agreement to meet their professional needs, which will increase the department’s actual cost. To decide whether expansion is necessary, the business weighs these increased costs against the anticipated productivity of the new hire.
Tangible costs for a landscaping company
A landscaping business wants to examine how much is being spent internally by compiling a complete cost accounting. They assessed the tangible costs associated with their landscaping projects. The organization’s tangible costs include the cost of hiring landscaping staff, fuel for trucks used to transport staff to jobs, and the cost of equipment purchased for employees to use on jobs.
The business owner examines the spending on each of these tangible costs over a period of several months by reviewing their financial records. They can determine the actual cost of each new job they book by totaling these expenses. This enables them to decide on prices for quotes to potential clients with knowledge, ensuring that every new opportunity is profitable.
FAQ
What is meant by intangible cost?
A cost that can be identified but is difficult to quantify or estimate is known as an intangible cost. Impairment of goodwill, a decline in employee morale, or brand damage are examples of common intangible costs. Intangible costs can have a significant impact on a company’s bottom line even though they are not easily quantifiable.
What are tangible costs and benefits?
Expenses for hardware and software, new hires, employee training, new or upgraded facilities, and machinery are examples of tangible costs. Lower production costs, improved productivity, and increased sales volume are tangible advantages.
What are the difference between tangible and intangible costs?
The main distinction between tangible and intangible is that the former can be seen, felt, or touched by a person and has a physical existence, whereas the latter cannot be seen, felt, or touched by a person and has no physical existence at all.
