By Jake Voelcker, owner, Bicycleworks
Many small business owners don’t realise they are making a loss with every sale of some types of goods. Are you one of them?
It’s easy to think that any sale which puts money in the till must be good. As long as you sell the item for more than its trade price, then you made a profit, right
Wrong. There is an important distinction between gross and net profit. Gross profit (GP) is the difference between how much you paid for stock, and how much you sell it for. Net profit (NP) is how much remains once you have also paid the rent, rates, wages, utility bills…
Most business owners understand this difference when it comes to the annual accounts, but how many think about the net profit on each and every sale?
It’s a difficult thing to calculate. If you sell a bike for £1,000 and you purchased it at £600, the GP is easy: £400. But what is the NP on that sale? In other words…
• How much of your rent should you apportion to that bike? (How much floor space did it take up? How long was it in stock for?)
• How much of your payroll? (How long did it take to build? How much time did staff spend discussing it with customers?)
• How much of your electricity bill? Insurance? Accountancy fees? Advertising costs?
It would be impossible to calculate the exact proportion of these costs for every product. Understandably, many small business owners give up, and look only at the GP instead. This is a big mistake, because too often it ends up in over-estimation of your profit margins, and ultimately selling products at a loss. How can we solve this problem?
The answer is: begin at the end, then work backwards.
1. Start with last year’s net profit. Deduct your own salary and dividends, and also any. corporation tax and income tax. What you are left with is the real net profit.
2. What is this net profit as a proportion of your turnover? (To find out, divide the net profit by your turnover, then multiply by 100 to turn it into a percentage). For example, a profit of £10k on a turnover of £200k is: 10/200 x 100 = 5%
3. Apply this percentage to everything you sell. 5% of that £1,000 bike sale is £50. So the £400 profit you thought you were making is actually only £50 net profit.
This is only an average. Some sales are more profitable than others.
For example, it may be that selling P&A is normally quick and easy, involves very little after-sales supp
Do you know your real net profit?