Also sometimes known as all-included cost, all-in cost is a term used to describe the total costs that are involved with a specific financial transaction. The scope of costs involved within that all-in cost will vary, depending on the nature of the transaction itself. Understanding this total cost makes it possible to determine if the transaction is likely to produce the desired results, either immediately or at some point in the future.
Many different types of financial transactions involve the need to assess the all-in cost of going through with that transaction. This is true when it comes to something as simple as taking out a mortgage for the purchase of a piece of real estate. The borrower must consider not only the principal amount borrowed, but also any closing costs associated with the purchase, application fees, the rate of interest charged on the principal and how that interest is applied to the outstanding balance throughout the life of the loan. Only after the total costs associated with the mortgage are determined can the borrower decide if the offer from a specific lender is the best deal, or it accepting the offer tendered by a different lender would be the best move financially.
The concept of all-in cost also comes into play when evaluating how a company does business. For example, in designing a commission plan for members of the company’s sales force, there is a need to identify each cost associated with supporting the sales effort and compare those expenses with the anticipated and reasonable results of those sales activities. Essentially, the idea is to make sure the company covers all expenses plus earns enough additional profits to make the idea of providing commissions to salespeople feasible.
Investors must also consider all-in cost when evaluating the acquisition of a given security. This means considering the purchase price of the asset, any tax liability that may be incurred as the result of ownership, and any broker or dealer fees that may be apply to the transaction. Assuming that the security is anticipated to increase in value within a reasonable amount of time, the investor can project when the total cost is recouped and the security actually begins to generate true profit from the venture. Here, there is some degree of risk. Should the asset fail to sufficiently appreciate in value within the projected time frame, there may be a delay in covering the all-in cost that ultimately motivates the investor to sell the asset at a loss or as soon as the security does generate enough return to cover the total costs of the original acquisition.
