Chapter 2 – Financial Control – Rule your money
This is part of the ‘How to’ coaching series. An ongoing series of activities to make your business successful. Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.
Activity 12 – I know on average, how much I make on each sale
How do you work out how much money you have made from each of your sales?
For some businesses it is relatively simple to work out how much profit has been made on a sale. For others, especially with a mix of products and services, it can be more complex.
It is important to know how much is made from a sale to understand the profit margin (or if any money is actually being made).
Speaking to a business owner many years ago, they were producing a product that they were selling for more than the components’ cost; but not taking into account the costs for the business, or their salary. So, they were really making a loss per each sale. When they understood the reality, they changed their business model.
You wouldn’t sell yourself short would you? I’ve seen business owners do it more often than I’d like to.
The ‘How to’ bit:
The two key profit types we are looking at in this example are gross and net.
If you want to understand the amount you are making against direct costs, calculate income from the sale verses the cost of sales. Cost of sales would typically include materials and associated costs, but exclude operating costs.
To understand your net profit on a particular sale, add the costs of running your business to the costs to make/supply the product (or provide the service), against the income made on that sale.
Sometimes it’s quite complex to make the calculations, so an average profit could be a better approach for you. For a large retailer, it could be easier to work out averages over time. This could be because an item may not sell until much later than the ‘acquired by, or produced by’ date.
As well as being able to see that you are making a profit (or loss), you can see trends and what products and services are your most profitable.
If you’d like help with working out the best approach for calculating how much money we make from each sale, follow this link and Contact Us…