For small and medium-sized businesses, it's important to understand landed costs in order to ensure accurate profit analysis.
As a component of supply chain management, landed costs can easily be overlooked or not even considered until later in the reporting process. By considering landing costs during supply chain management, it can help to make sure items will be profitable after they are imported.
What are Landed Costs?
To put it simply, landed costs are the costs involved in importing purchased goods. They are the total cost of a landed shipment including purchase price, freight, insurance, custom duties and other costs up to the port of destination.
It’s important to understand landed costs are associated with importing goods, but not the cost of buying goods from the supplier. However, both need to be considered in order to calculate the total cost of an item.
For example, if you sold a T-shirt for £25, which cost you £15 to buy and £5 to ship, your profit is £5. Without considering landed costs, you could report your profit on this item as £10, which could mislead you to make poor buying decisions.
I sold a T-shirt for: 25.00 (Revenue)
But it cost this much to buy: 15.00 (Cost of sale)
And it cost this much to ship: 5.00 (Cost of sale - Landed cost)
So my profit is: 5.00 (Profit)
Examples of Landed Costs
- Hiring a shipping container
- The cost of transporting the container
- Insuring the goods during transit
- Duties payable to get the goods into the destination country
Why are Landed Costs Important to your Business?
1. Accurately calculate profit on every item
Landed costs give you a clearer idea of how well your business is performing by accurately calculating profit on every product.
2. Ensure sales prices are profitable
It allows you to see the true cost of products, giving you the ability to know what price to sell it for and the maximum discount you can give in order to ensure a profit.
3. Analyze where savings can be made in the supply chain
You can see the different costs involved in purchasing goods, allowing you to identify where you can make savings during supply chain management.
4. Correctly account for landed costs for accurate financial reports
Accounting for landed costs allows you to see accurate asset values and accurate monthly profits for the business.
Who is affected by landed costs?
The sales manager
The sales manager needs to consider landed costs as they decide what price to sell items at and ensure sales are profitable and competitive. Accurate costs can help sales managers to calculate sales prices.
The merchandise planner/buyer
The merchandise planner or buyer is responsible for which products to buy, making sure the business buys the most profitable and best selling items. Landed costs provide accurate cost of sales to help them see which items have the highest margins.
The bookkeeper or accountant provides balance sheets and profit and loss reports for the company. Incorporating landed costs will allow the bookkeeper/accountant to see accurate asset values and monthly profits for the company in a valuable and timely fashion.