When you are running a business, there are many expenses you have to bear if you want to streamline your operational framework without interruptions. For example, if you are in the manufacturing realm, then you need to purchase raw materials, chemicals, machinery, etc. All of them belong to one category in the business world. That is ‘Landed Costs’. No business can avoid these costs as they directly connect to the smooth process of workflow.
What are these landed costs? How can you conduct a landed cost analysis? Why is landed cost important to businesses? You are going to find all the answers to them in this article now.
What are Landed Costs?
- First, let us walk you through the true essence of this concept. Landed costs refer to the total expenses related to the production of goods and bringing them to their final destination.
- These costs are not limited to the initial purchase price of the goods but also include various additional expenses such as transportation, insurance, customs duties, taxes, handling fees, and any other charges associated with the shipment and delivery process.
- In other words, these are the total costs associated with a product throughout its journey from the factory to the buyer’s hand.
- Why is there so much attention paid to landed costs inside the business world? As you can see, understanding landed costs and what is included in the landed cost is crucial for businesses engaged in international trade as it provides a comprehensive view of the total investment required to obtain inventory.
- If you can estimate all relevant expenses, you can accurately calculate the true cost of goods sold in the first place. That is not all! You can also determine pricing strategies, assess profitability, and make informed decisions regarding sourcing, shipping methods, and supplier negotiations.
- For instance, imagine that you are associated with a shipping method that is highly expensive and takes too long to transport your products. When you conduct a landed cost analysis, you will be able to see the clear difference between the estimated landed costs and the actual digits. Why would you collaborate with that logistic company again when you can reduce this easily with another partner?
- This is what landed cost accounting actually does!
- This not only gives you a thorough idea of your landed costs but also gives you new suggestions and insights to walk on a journey towards maximum ROI at the end.
How to Calculate It?
If you are worried about calculating the landed costs of your business, it can be done in two different ways. One is obviously the manual method, through your finance department. The other way is through automated calculators.
No matter what method you opt for, the landed costs always have one universal formula. That is,
Product + Shipping + Customs + Risk + Overhead = Landed Cost
Let us explain this step-by-step.
Step 1: You need to calculate the overall expenses you bore for the production of the goods.
Step 2: Then the expenses for shipping need to be taken into account.
Step 3: This means expenses that are associated with customs, which include all tariffs, taxes, and duties required by the country’s regulations.
Step 4: Then comes the cost of protecting your investment. This includes insurance, compliance, and quality assurance.
Step 5: These are additional costs, but they are highly possible in the business world in Singapore. It includes currency conversion, payment processing, and bank charges.
Step 6: There comes the total landed costs.
Key Facts to Consider When Calculating Landed Costs in Singapore
Shipping Costs
Since most businesses are linked to the global marketplace, this is one of the main facts you must take into account.
What exactly does this mean? Shipping costs are a fundamental component of landed costs as they present the expenses associated with transporting goods from suppliers to the final destination.
These costs include freight charges, handling fees, customs duties, and insurance premiums incurred during transit. We have stepped into an era where the whole world has become one component in the business aspect. In today’s dynamic business environment, where globalisation and international trade are prevalent, understanding and factoring in shipping costs should receive the number one spot on the list of landed costs.
The next question is, will they keep changing more often? Yes, that is the fearful part about shipping charges. Fluctuating fuel prices, geopolitical tensions, and regulatory changes can significantly impact shipping expenses, for sure. One tiny change in one element of this chain can drastically affect the overall landed costs and, ultimately, the bottom line.
The main reason why businesses have to put a heavy weight on these landed costs is due to their impactful nature on profits at the end. If you Ignore or underestimate shipping costs can lead to inaccurate pricing, diminished profit margins, and operational inefficiencies, which make your growth highly slow.
Therefore, businesses must carefully analyse and optimise shipping strategies to mitigate risks, enhance competitiveness, and ensure profitability in the ever-evolving global marketplace.
Insurance and Compliance Costs
In this section, we are focusing on the risk factor! No business can avoid risks, yet it cannot stay away from taking these risks as they lead to eventual growth.
This is where the insurance comes into consideration as a much-talked-about landed cost. In Singapore’s dynamic business landscape, insurance and compliance are considered top necessities due to the country’s legal system.
What are the risks covered by it? Insurance expenses cover risks associated with transportation, protecting goods against damage, theft, or loss during transit. On the other hand, compliance costs consist of fees related to adhering to Singapore’s stringent regulatory requirements, including customs duties, tariffs, and taxes.
The main point we should focus on is that it is highly necessary to think of all of them when calculating and estimating landed costs for your business. They directly impact the overall cost of acquiring goods and bringing them to market. If you fail to account for insurance and compliance costs accurately, it can lead to financial losses, unnecessary delays in shipments, and regulatory non-compliance penalties, which Singapore pays much attention to.
There are no gaps to slip away from these costs in the business world, especially in the Singaporean context. It is always better to conduct research on them before choosing your insurance partner. For compliance requirements, you have the opportunity to collaborate with a reputed consultant, for sure.
Foreign Customs and Import Duties
Next comes the customs expenses. This situation may vary depending on the type of method you follow. For example, usually, once the seller dispatches the goods, ownership of the products will be transferred to the buyer. However, in the mass production business world, this is a bit different. Most of the companies have agents in foreign countries, and they are the ones who receive the goods in the first place. This is why foreign customs duties and import taxes have to be paid by the seller himself.
The global rule for import taxes on goods is that the receiver should pay the customs fees. These duties are calculated based on the value of the imported goods, their classification, and the applicable tariff rates.
You need to be aware of this situation and have a clear view of who is going to receive the products at the final destination. If you fail to accurately assess and account for these duties, it can result in unexpected expenses and delays at customs checkpoints.
Some of these fees include a special handling charge for certain goods, such as chemicals, vehicles, etc. This means the logistic labourers have to be extra careful with the load they handle.
On the other hand, you will have to pay a lot more than you ever predicted, which will drastically affect your profits.
Export Licence and Exchange Rates
Though this is one of the major concerns, most companies fail to identify this as a key fact in calculating landed costs.
This is highly important, as it directly impacts the overall expenses incurred in international trade. Export licences, in the sense that we are talking about the legal requirements and fees necessary for exporting goods, directly affect the cost structure.
However, exchange rates are known as the most influential factor in the conversion of foreign currencies into domestic currency. This clearly affects the pricing and profitability of goods. Since, after the COVID pandemic, global markets tend to fluctuate dramatically, this is something that you must take into account.
There is no need to say that ignoring export licences can lead to legal penalties and delays within Singapore. On the other hand, fluctuations in exchange rates can significantly affect profit margins.
When you keep in mind these facts when estimating landed costs, it will not affect your business plans in the end and boost your preparedness for exchange rate fluctuations.
Automate Your Landed Costs Calculations through Modern Tools
There is no financial department on earth that can rapidly adjust to market and rate fluctuations overnight. However, if you have implemented an automated tool for calculating landed costs, it will not only draft you the expected costs but also predict the patterns of fluctuations in advance. Collaborating with the right partner makes you achieve your business goals in no time!
