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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