The Value of TLC: Calculating Total Landed Costs
What do you think of when you hear the initials TLC? The first thing that probably comes to mind is “tender love and care.” You might also recall the 90s R&B group and their massive hits “Waterfalls” and “No Scrubs.” But did you also think about “total landed cost”? If not, it’s probably a good idea to familiarize yourself with this important concept.
Defining total landed cost (TLC)
Total landed cost, which is also known as total delivered cost or simply landed cost, comprises all of the expenses related to a product. Of course, the starting point for calculating TLC is the unit price of an item. However, you also need to factor in all of the expenses related to making that item salable. In effect, TLC represents how much skin in the game you have when a transaction occurs.
Expenses associated with inventory will vary depending on the industry and size of a business, but some are nearly universal. Transportation costs are the most obvious example. Almost every company needs to receive inventory in order to be able to sell it, and items don’t just get delivered for free. Any tariffs, taxes, duties, or other imposed fees are also common factors in TLC. Others costs include the cost of holding a product as inventory and any promotional costs related to the product.
Why it matters
Calculating TLC gives a business greater knowledge of their supply chain costs. If a product or line has a disproportionate amount of ancillary expenses, it can end up affecting profit margins in ways that would be difficult to understand without a knowledge of the associated TLC.
TLC also synthesizes disparate strands of information to provide greater context. Let’s say an appliance store has 100 refrigerators in a warehouse. They know how much they paid for those refrigerators, they know how much it cost to get them delivered, and they know how long they’ve been there. They may not know, however, exactly how the second two costs effectively increase the first. TLC allows them to do that.
How it Relates to Accounting
Accountants that understand the TLC of products can provide business owners with valuable information and gain a reputation as a trusted advisor. Truth be told, most business owners have no idea what TLC is or how to calculate it. However, because it’s so easy to demonstrate it in practice, everyone can grasp how it affects their bottom line.
Let’s return to that refrigerator example. What if the stock had been sitting in a warehouse for a year, taking up a good deal of square footage. Combine that with shipping and other costs, the TLC of those refrigerators may be close to double the initial price per unit. That information could inform decisions from the business owner, saving them money in the long run. Wouldn’t you want to be able to provide that information to your clients? Ready for a free test drive click here.