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www.financial-training-seminars.co.uk
Barrow Boy’s Guide
to Profit
Business Finance Training
www.financial-training-seminars.co.uk
Barrow Boy’s Guide
to Profit
Business Finance Training
Bazzer’s
www.financial-training-seminars.co.uk
Business Finance Training
The recession has pushed many businesses in to bankruptcy, including some famous high street names.
But come boom or bust, businesses like Bazzer’s fruit and veg stall always do well.
How do they do it?
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Bazzer’s business secrets
– Bazzer has a clear business objective and strategy
– He knows what his customers want
– Bazzer is master of the essential business finance skills
– And managing cashflow is his number one priority
It’s far too important to leave to my accountant
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Cashflow is the ‘lifeblood’ of the business
• But how do you get strong cashflow?
– Ready access to additional funds
– Good working capital management
– Strong profits
Strong profits are the key to growing your business
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Making strong profits
– The profit concept seems straightforward
But not all costs work in the same way!
Revenue minus Costs = PROFIT
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Barrow Boy’s Guide to Profit
• How Bazzer runs his business
Selling price of one box of fruit £15.00Cost of one box of fruit £10.00Gross margin £ 5.00
I make a £5 margin on each box of fruit I sell
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• How Bazzer runs his business
Selling price of one box of fruit £15.00Cost of one box of fruit £10.00Gross margin £ 5.00
Daily cost of renting the market stall = £40.00
I pay £40 each day to rent the market stall pitch
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• How Bazzer runs his business
Selling price of one box of fruit £15.00Cost of one box of fruit £10.00Gross margin £ 5.00
Daily cost of renting the market stall = £40.00
The stall rent is paid for after selling £40.00 = 8 boxes of fruit £5.00
So the stall is paid for when I’ve sold 8 boxes of fruit
Accountants call this the break-even point
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Break-even point
– The most important dividing line in business
– It’s the sales level at which the business just covers its costs
• Below break-even sales level the business will make a loss
• Above break-even sales level the business will make a profit
I always know what the break-even point is for my stall
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Barrow Boy’s Guide to Profit
• Break-even point
– Based on the principle that there are two kinds of business costs
– Variable costs
• Change with sales level
– Fixed costs
• Change with time
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• How Bazzer runs his business
Selling price of one box of fruit £15.00Cost of one box of fruit £10.00Gross margin £ 5.00
Daily cost of renting the market stall = £40.00
Variable cost
Fixed cost
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Gross margin
– Gross margin = sales minus variable cost
Sales are very important
But gross margin is the REAL income of your business
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• How Bazzer runs his business
Selling price of one box of fruit £15.00Cost of one box of fruit £10.00Gross margin £ 5.00
Daily cost of renting the market stall = £40.00
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Break-even point
– Work out your break-even point
– By dividing fixed costs by gross margin
Break-even point = Fixed costs
Gross margin
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Gross margin
Selling price of one box of fruit £15.00Variable cost £10.00Gross margin £ 5.00
Fixed cost £40.00
Break-even point = £40.00 boxes of fruit £5.00
Break-even point = 8 boxes of fruit
Which means that once I’ve sold 8 boxes of fruit I make £5 clear profit on every additional box of fruit I sell
www.financial-training-seminars.co.uk
Business Finance Training
The gross margin and break-even idea seems obvious but not everybody gets it.
Take my mate Frank, for example. He has a nice little wholesale business selling women’s clothes.
Sales and profits at Frank’s Fashions have been going down over the last year or so - Frank got in to a bit of a panic thinking how to improve things.
He started talking about reducing the price of his best selling items so he could get the sales level back up.
Luckily I managed to talk him out of it!
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Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
This is one of Frank’s best selling items – it made £25k margin last year
Ladies cashmere overcoat:
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£ 90.00 - 10%
Frank was going to reduce the selling price by 10%
Ladies cashmere overcoat:
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£ 90.00 - 10%
But that would reduce the gross margin on each coat by 40% !!
And remember – gross margin is the REAL income of the business
Ladies cashmere overcoat:
£ 75.00£ 15.00 - 40%
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£ 90.00 - 10%
Ladies cashmere overcoat:
£ 75.00£ 15.00 - 40%
1,200 + 20%
Frank thought the price reduction would increase sales units by 20%
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£ 90.00 - 10%
Ladies cashmere overcoat:
£ 75.00£ 15.00 - 40%
1,200 + 20%
But margin from sales would still be 28% less than before the price cut
£18,000 - 28%
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£ 90.00 - 10%
Ladies cashmere overcoat:
£ 75.00£ 15.00 - 40%
1,667 + 67%£25,005
Frank would have to sell 1,667 coats to make the same margin as before
That’s a 67% increase in sales – it’s never going to happen!
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• So how can Frank increase profits?
– Increase sales volume - sell at same price and gross margin
Frank could try advertising as a way to increase sales volume
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• So how can Frank increase profits?
– Increase sales volume - sell at same price and gross margin
– Increase price and gross margin - sell same volume
Bet you’re thinking that if we increase the price the sales will drop
That doesn’t necessarily mean Frank will be worse off – look at this
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£110.00 + 10%
Ladies cashmere overcoat:
£ 75.00£ 35.00 + 40%
Increasing the selling price by 10% increases gross margin by 40%
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Managing gross margin: Frank’s Fashions
Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00
Annual sales units 1,000Gross margin from sales £25,000
Before After
£110.00 + 10%
Ladies cashmere overcoat:
£ 75.00£ 35.00 + 40%
700 - 30%
Even if sales fell by 30% Frank would be hardly worse off in margin terms
£24,500
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• So how can Frank increase profits?
– Increase sales volume - sell at same price and gross margin
– Increase price and gross margin - sell same volume
– Reduce break-even point
• By reducing variable costs to increase gross margin
• By reducing fixed costs
Frank could replace that fancy Jaguar sports car for a start!
www.financial-training-seminars.co.uk
Barrow Boy’s Guide to Profit
• Bazzer’s pukka profit rules
– Cashflow is the lifeblood of the business
– Strong profit is a vital source of additional funds
• Gross margin is the real income of the business
• You can’t make a profit until sales exceed break-even point
• In other words until gross margin covers fixed costs
So make sure you check gross margin before you change your prices!
www.financial-training-seminars.co.uk
Look out for my Barrow Boy’s
Guideto Cashflow
Business Finance Training
www.financial-training-seminars.co.uk
Business Finance Training the cost effective way to improve business results
Paul Lower FCMA