Costing and pricing your service
Introduction to Pricing and Costing
With new challenges in financial management facing the social service sector in Western Australia this section attempts to provide some clarification around the concepts associated with costing and pricing of services. In essence there are two primary objectives, firstly to work through some of the jargon associated with costing and pricing by offering, and in some cases prescribing, a series of basic definitions and explanations related to the new social service procurement regime. Secondly, we aim to identify how costing and pricing sits within a broader financial management system - without overly complicating it or requiring material change to generally accepted processes.
The fact remains, whether we like it or not, recent government initiatives has meant all of us who work in, care about, represent or fund the not-for-profit sector in WA need to reconsider how we look at the sector’s programs and services from a financial perspective. We can complain about it, or we can join in the fun and make a real difference to how it’s done. In essence, the new partnership approach to funding requires us to be able to speak the same, consistent language when it comes to our finances.
We need to be able to explain our costs, understand the basis of our prices, analyse our overall financial result and most importantly portray the aspirations of our organisation in a structured manner. Whilst it may be a challenge to move into a regime where we’re asked to provide a price for a service we’ve been providing on a cost basis for potentially many years, it’s actually not a huge leap from a financial perspective.
There is one very important point to understand from the outset: what’s required under the new procurement regime does not have to cause mind-bending confusion and does not require strong accounting knowledge - both distinct wins for your personality. If you have a sound understanding of your organisation’s services and a reasonable degree of common sense you can use it, and this new language, to improve your lot with your funding partners. Because we’re discussing principles and concepts, everything suggested in the following pages can fit within your current financial management system, however extensive or basic that might be. Some accounting software may need some hand-holding, but nothing particularly complicated or expensive. You can apply your own judgement as to how much detail you will need but overall this is evolution not revolution.
All of us who care about the sector’s ongoing viability hope that costing and pricing methodologies become clearer and more consistent. At this stage of the game however we all need to sift through a few things, highlight areas of fluidity and
move toward some generally agreed approaches over time, in partnership with funding agencies. WACOSS and other peak bodies will also be working hard to lead and support this process, providing more information and more specific resources.
Working with an accountant’s brain
We mentioned above that you do not need to be an accountant to get a handle on costing and pricing. But it does help in these early stages to venture into the accountant’s rather structured brain – a scary world of grids, tags and beige safari suits - to pick out a little bit of theory. We can all appreciate how us accountants have muddied the generally clear waters of ‘counting’, but it seems, if we stretch our Latin, that by adding the ‘ac’ we mean ‘counting in two’s’, or more specifically – counting twice .We mention this because the whole basis of our bookkeeping, whether you live in the corporate, government or not-for-profit sector, is what’s known as ‘double-entry’. That in essence means every transaction is categorised or ‘tagged’ twice – counted twice if you will. Simply stated, we use one tag to explain the reason our financial position has changed and the other to update our overall financial position after the transaction is concluded. These ‘tags’ have traditionally taken the form of account numbers – you've no doubt run into them on expense reimbursement sheets or the like. Let’s take a simple example below:
You buy a coffee from a Cafe. You pass the nice person your money and receive coffee: give money - get coffee. In double-entry bookkeeping both sides of the exchange are tagged in the accounting system, i.e. what you give (money) and what you get (coffee). After you’ve processed the transaction, your accounting system will tell you what you spent the money on (coffee) and how much money you have left in the bank after you’ve bought the coffee.
N.B: the gives and gets also represent the debits and credits accountants refer to.