The Mirage of a 25% Profit Part 2
Profit – that elusive pot of gold.
So, we have determined if you price a product at cost plus 25%, you will make a net profit of 4% to 8% if everything goes well. Profit margins this thin are the principal reason most small businesses fail – it does not take much of a loss to sink your ship.
A substantial portion of my clients come to me complaining about the fact that they add a whopping 25% to their cost and still come up short at the end of the month. My answer is – “your bidding procedure is terrible, and as long as you insist on doing it this way – you will come up short.
I liken their situation to someone with a bad golf swing that complains about their score. Well, your score is directly related to your swing – if you don’t like your score, change your swing.
We have a choice – we can continue to live on the edge utilizing the cost plus approach or –
WE CAN TAKE A LEAP TOWARDS PROFITABILITY.
To ensure that you are going to make a profit you need to know the value of three things
The cost of the product – that is cost of goods sold “cogs”
The cost of your operating expenses – “G&A” - these are expenses you need to pay no matter what – they include - insurance, rent, phone, utilities, office supplies – they also include management
Your target net profit
Once you have these three values – it is very easy to establish your pricing. Now, let’s dive into all three. COGS – you’ve got this – it is very simple to quantify – if you are not providing the product you do not have the expense
G&A – this is the business cost that confounds many of my clients.
However, do this –
Print off your last three bank statements – highlight every expense that you must pay regardless of whether you are working – this category will include loan payments
Tally all 3 months of costs and divide the sum by three –
You now have a pretty good grip on your monthly G&A
Net profit – let’s target 12% and assume you are earning some management income within the G&A.
Now – let’s go back to that bid in the first video and for purposes of example – i’m going to value your monthly G&A at $35,000 which includes $8,000 for you as the manager.
Also, we need to know how much of your monthly capacity the bid is going to consume – let’s assume it will take ½ of your month’s capacity – that means it will require $17,500 of G&A. So - what is the bid?
Simple - the bid is $133,523. Did you get that? If so – good for you. We are going to explore this bidding protocol further in the next blog THE MIRAGE OF A 25% PROFIT – PART 3. I hope you will join in.
View the corresponding video on YouTube!