A guide to third sector trading - WCVA

It’s an idea, but is it business? A guide to third sector trading
Appendix 1 Appendix 2 Appendix 3
9. Calculating unit cost: The unit cost in the above example is the
total cost (£83,050) divided by the number of hours care provided
over 50 weeks (100 X 50)
= 83,050 ÷ 5000 = £16.61/hour.
10. Handling variations in the number of units: Using the same
component costs in the above example, but for 50 hours care per
week rather than 100, the only really significant change in costs
will be that of the care hours (down to £31,975) giving a new total
cost of £51,075. Dividing this by 2500 hours for the year produces
a significantly higher unit cost of £20.43/hour.
11. Calculating the number of units for fixed price contracts:
Commonly, the contractor will indicate the price of the contract
and it will be up to you to work backwards to calculate the
number of units (hours of care in the example) you can provide
for the money on offer. You could get the answer by trial and
error by repeatedly adjusting the number of care hours. The direct
approach is to subtract the total non variable costs from the contract
price and then divide the remainder by the variable unit cost (which
in the example is the ‘real hourly rate’ figure of £12.79).
Say the contract price is £60,000. Subtract the fixed costs of
£19,100 to give £40,900 and divide by £12.79, which gives 3198
units (hours) per year – or 64 hours per week over 50 weeks.
It is important to recognise that this approach only works if you do
not trigger any break points which could significantly reduce or
increase the fixed costs. The only sensible course is to be extremely
methodical with calculations and relate them to the reality of your
organisation at each step.
12. Profit: Once you have calculated the unit cost and the total
cost of a project you are contracting for, you can consider the
possibility of adding a percentage of the total on top for profit
(which is what the private sector will always do, and which you
would presumably use to subside some of your other charitable
services). Whether the customer will let you get away with this is
another matter, of course.
But be careful to make the distinction between profit and the
financial benefit you create by charging for a proportion of your
core management and administration costs. These are real expenses
borne by the contract which the customer must expect to pay for.
13. Cost centres and the annual budget: Once you have adopted
the principle of cost centres for working out unit costs for your various
services, you will almost certainly find it useful to prepare your annual
budget under the same cost centre headings as well. Paragraph 8
indicates the type of expenditure information that the cost centre
budget should incorporate. Itemising your income will follow the
same principles. Ask for help if you are unsure how to go about this.
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