Transcript Improving Your Business`s Profitability

Improving Your Business’s
Profitability
Learn how to analyse your pricing on
products and services to focus on
profits.
• As a Certified FocalPoint Business Coach
Eloise works with a broad spectrum of
clients to increase their sales, profits,
efficiencies and more in their businesses.
• She brings over 28 years of award
winning experience, from various
leadership roles in the distribution,
manufacturing and service industries .
• Eloise has presented dozens of
workshops to hundreds of professionals
and business owners increasing their
effectiveness and business results.
• She also specializes in working one on
one and in group to help her clients
achieve massive success in their
business.
Eloise Pasianotto CMA MBA
“Focusing on Success”
How can you increase Profits?
Objectives today:
1. Understand the impact of Costs and
Expenses on your Breakeven point.
2. Learn the impact of gross margin and cost
mark up methods on your profitability.
3. Build a pricing model to understand the
impact of pricing and the affect discounts
have on your business
Agenda
• Definitions of key terms and some questions
• Cost Mark up and Gross Margin Pricing
Methods
• Pricing Model
• Affect of Discounts
• Next Steps
Definitions
• Cost of Goods Sold = the sum of the costs
related to the products or services sold
– Fixed Costs e.g. equipment
– Variable Costs are volume
related e.g. materials
– Classification and Assigning
How are you defining and allocating your
costs?
What level of review do you have in place?
Definitions
• Gross Profit = Difference
between Sales and Cost of
Good Sold
• Gross Margin
– Generally is stated in percent
– Gross Profit divided into Sales
– Gross Margin Dollars is the
same as Gross Profit
Sales =
125.00
COGS =
75.00
Gross Profit =
50.00
Gross Margin =
40%
(50/125*100)
How have your
margins been
tracking?
Definitions
• Expenses
– Fixed Expenses e.g. headcount
– Variable Expenses e.g. office supplies, travel
– Discretionary
What are your biggest expenses?
How much discretionary spend do you
have?
How are you controlling them?
Definitions
• Contribution Margin (Dollars)
– Sales less variable costs
– Excellent to use to compare what products or
services contribute more to your profitability
– Analyze for opportunities to reduce costs
What are your Contributions Margins by
Product or Services?
Check Point
• Know your total fixed costs and expenses
What is your Number?
– What makes it up?
– This number is a key baseline number that you
must recover through profits
– Look for ways to minimize these
• Ideas?
Definitions
• Break Even = What volume of units do you
need to sell to recover all your fixed costs and
expenses?
– Calculate Total
– For each Product or Service
What is your break
even level?
Break Even Working Example
Selling price = $125.00
Fixed Costs and Expenses total = $250,000 *
Variable Cost = $75.00
Breakeven = Total Fixed Costs and Expenses divided
by (Selling price – Variable Cost)
Step 1
Step 2
$125.00 - $75.00 = $50.00
$250,000/$50.00 = 5,000 units
Break Even Working Example
Therefore Total Sales must be at least
5,000 units X $125.00 = $625,000
What is your total
sales needed? How
are you tracking?
Cost Mark up and Gross Margin Pricing
Methods
• Cost Mark –up
– Add a dollar value to your Cost to determine
Selling Price
– Apply a factor to your costs to Determine your
Selling Price
• Gross Margin
– Use a predetermined desired Margin to determine
your Selling Price
Cost Mark up and Gross Margin Pricing
Methods Compared
Cost Mark up
Cost = $75.00
Mark up = $30.00 or 40%
Gross Margin
Cost = $75.00
Desired Margin % = 40%
Selling Price = $105.00
Calculated as:
$75.00 +$30.00=$105.00
or
$75.00*1.40= $105.00
Selling Price = $125.00
Calculated as:
$75.00/(1-.40)=$125.00
Profit = $30.00 (28.6%)
Profit = $50.00 (40%)
Cost Mark up and Gross Margin Pricing
Methods Impact to Gross Profit $
$350.00
$300.00
$250.00
Gross Profit using Gross
Margin to calculate SP
$200.00
$150.00
Gross Profit using Cost
Mark up to calculate SP
$100.00
$50.00
$10% 20% 30% 40% 50% 60% 70% 80%
Basic Pricing Model
Pricing Analysis and Modelling
Price per unit
$
125.00
Units Sold
5000
Variable Cost per Unit
$
75.00
Percentages
Sales Revenue
$ 625,000.00
100%
Variable Costs
$ 375,000.00
60%
Contribution Margin
$ 250,000.00
40%
Fixed
$ 250,000.00
40%
Profit
$
0%
Break even sales Volume
Break even sales
$
Per Unit
$ 125.00
$ 75.00
$ 50.00
$ 50.00
$ 5,000.00
625,000.00
Basic Pricing Model
Pricing Analysis and Modelling
Price per unit
$
145.00
Units Sold
5000
Variable Cost per Unit
$
75.00
Percentages
Sales Revenue
$ 725,000.00
100%
Variable Costs
$ 375,000.00
52%
Contribution Margin
$ 350,000.00
48%
Fixed
$ 250,000.00
34%
Profit
$ 100,000.00
14%
Break even sales Volume
Break even sales
$
Per Unit
$ 145.00
$
$
$
$
75.00
70.00
50.00
20.00
3,571.43
517,857.14
Affect of Discounts
• Discounts must be carefully considered to not erode
profits BEFORE fixed expenses are recovered.
Pricing Analysis and Modelling
Price per unit
$
112.50
Discount by 10%
Units Sold
5000
Variable Cost per Unit
$
75.00
Percentages
Per Unit
Sales Revenue
$ 562,500.00
100%
$ 112.50
Variable Costs
$ 375,000.00
67%
$ 75.00
Contribution Margin
$ 187,500.00
33%
$ 37.50
Fixed
$ 250,000.00
44%
$ 50.00
Profit
-$ 62,500.00
-11%
-$ 12.50
Break even sales Volume
Break even sales
$
6,666.67
750,000.00
Next Steps To get more control over
your Profits
1.
2.
3.
Know your Breakeven Point
Review your Pricing and Discounts
Understand your costs and expenses
– Separate variable versus fixed
– Plan in place for regular review and reduction *
4.
Analyze your products and services
– Know your Profit generators
– Address your Profit eaters
• Tools to help
– Pricing matrix model
– * PIC Profit improver Checklist for Costs and Expenses
Thank you
For letting me share some concepts with you .
I hope you take action and have a positive effect on your business!
If you would like to receive
•
Pricing model template
•
PIC Profit Improver Checklist
•
Questions and/or more information
Please contact me at either: [email protected]
Or call 289-553-0241
Have a profitable 2013!
Eloise Pasianotto CMA MBA