Understanding Transaction Cost and Analysis

understanding transaction cost and analysis

It's essential to ensure that all resources are expended appropriately when facilitating an exchange between buyer and seller. From labor costs to commissions and travel expenses, there are many incurred costs from creating, selling, and delivering a product or service to a market.

Utilizing a proficient business intelligence tool to perform a cost analysis will help assess market conditions, analyze pre trade costs, ensure resources are used effectively and net returns are worth any investments.

Here is an overview of transaction costs and how a BI tool can help to conduct a transaction cost analysis.

What are the Transaction Costs?

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Transaction costs are expenses incurred through purchasing or selling goods in a market. Included are labor expenses and trade costs needed to create and deliver a product or service to an exchange.

Financially, transaction costs include the real-time sales team's commissions and incidental expenses which are the difference between the company's payments to a supplier and the price the customer ends up paying for a good/service.

The transaction expenses are the payments that banks, the sales team, and brokers acquire for their work. Investors and businesses take transaction costs seriously because they reflect on how high or low their net returns will be. Over time, transaction expenses will decrease a return on investment and reduce the working capital available to invest.

Organizations are better off when transaction costs are minimized because there are more available resources and labor to generate wealth. With new technology, the price of goods has decreased because there are fewer communication barriers that influence transaction expenses.

Ecommerce companies such as Amazon are middlemen that connect customers to manufacturers. Over the years these companies have thrived because there are no longer the incurred communication expenses that constitute transaction costs.

Here are the best examples of transaction costs-

  • Commission paid to broker or salesperson for finalizing a sale.
  • Signing a contract and bargaining prices as part of a transaction.
  • Search cost or the money expended by the consumer to research the best product or service to make a purchase.
  • The cost of time and travel to complete an exchange between two parties.
  • Time and labor associated with moving goods to another location.

What is a Transaction Cost Analysis?

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A transaction cost analysis allows businesses to use benchmarks to analyze the transaction expenses incurred by making an exchange within a time frame.

A business intelligence tool is utilized to assess these costs and display market data analysis through visual representations and interactive tables.

Transaction cost is calculated by comparing the trade price to each performance indicator. If the number is positive, the trade was to the company's benefit and vice versa.

The different benchmarks used to measure performance in a transaction cost analysis include-

  • Marketability- This benchmark tells whether a product/service was purchased at a higher/lower price than the asking price when the order was finalized.

  • Transaction Cost- Each exchange has expenses associated with it. Businesses measure execution quality by comparing exchanges to industry-standard metrics.

  • Basis Point- A measuring unit utilized in finance to show the change of percentage in the interest rate or other financial instruments (assets that can be traded).

  • Currency- This includes the measuring of commissions, underlying assets in derivatives trade (notional value), and the total premium (or the amount paid for an insurance policy).

  • Methodology- Each order execution is marked according to different benchmarks such as price improvement (orders are sold at better prices than the quoted standard market prices), or arrival price (a trading strategy utilized to outperform the asking price when the order is finalized).

    Exchanges are weighted by their amount. Tables are utilized to breakdown the item's performance in various categories such as date, price, order type, trade volume, etc.
Transaction cost analysis reporting is important because it allows businesses and asset managers to gain immediate real-time insights into their transaction data and how it affects the bottom line.

It allows users to analyze both the buy-side and sell-side to see whether orders are being routed to the best exchange that offers the best-priced trades. It provides a way for stakeholders to analyze the market impact or cost difference between when an order is received and when it is sold.

Most importantly, conducting a transactional analysis shows the performance of net returns on investments. Without performing a cost analysis, it's easier to misplace resources, make poor investments, utilize ineffective exchanges, and waste money. All of this affects the ability to generate profit and continue innovating.

Conclusion

In conclusion, the key takeaways to remember about an analysis TCA include-

  • Transactional expenses are incurred through purchasing a good or service in a market.
  • Examples of transaction costs include commissions, brokerage fees, labor costs, time and travel, search costs, and more.
  • When transactional costs are low, there's more available capital to generate wealth.
  • Cost analysis is utilized to analyze net returns and assess whether an investment was worthwhile.
  • A cost analysis measures the performance of a trade by utilizing different benchmarks such as marketability, transaction cost, basis point, currency, and methodology.
  • Cost analysis reporting allows stakeholders to gain real-time insights into their investments and see whether they provided a net-return.
  • Utilizing a BI tool to perform a transactional analysis is the preferred option as it presents reports and interactive visuals and tables that accurately describe transactional data.