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 30 – I know what Markup is and target levels
I’ve often heard the term Markup being used, but when I asked people what it means, it seems it can mean different things.
Simply put the definition of Markup is, the difference between the selling price of your goods/services and the cost to provide them. Markup is often expressed as a percentage over the cost. A Markup is added into the total cost incurred by the producer/supplier to provide the goods/services in order to cover the costs of doing business and create a profit.
This simplistic statement is ok, as far as it goes, but what are your costs?
It should be easy to know how much you sold somethings for. What is, sometimes, not so easy to understand, is the costs you include for making the calculation.
to understand your Markup amount, take away the costs of goods/services sold (this gives you the Gross figure), and then take away a portion of your overheads (this gives you the net figure.
I have seen business owners who think they are making a great margin, with the Markup percentage then have chosen, who then find that the way they are accounting for their overheads makes it a much smaller profit; and in some cases, a loss.
When you understand what percentage profit (Gross or Net) you want to make, Markup allows the you to determine the amount of money that will be made from each unit of sale.
For example, if you sell a popular product you may want to target a total markup of x%. But some of the items in the product are just general components that you wouldn’t necessarily put a markup on them. It may be that a markup of x% across the who product might make it less competitive, hence you may choose to just cover the cost of purchase for some items. So you need to understand how your markup breakdown.
By understanding your markup targets, you know if you have room to negotiate a deal. That might be a discount, I don’t like discounts, or a value add. Say you sold water tanks, you might give a small sample bottle of cleaner as a value add and record it as a marketing cost.
The ‘How to’ bit:
If you wanted to add 20% markup on a sales item, multiply the original price by 0.2 to find the amount of a 20% Markup, or multiply it by 1.2 to find the total price (including markup).
To find your costs, add together all the costs for supplying an item and then add an amount for overheads.
Depending on your business, you will, need to define a way to apportion this in a way that can be associated with the unit of sale. i.e. you might take the total cost of overheads and divide it by the number of items sold over a time period. If overheads are £5000 for the month, and if you sell 800 items, of the same value, that would be an overhead cost of £6.25 per item. It gets more complicated when you have multiple sales prices and costs. If you do not have an electronic accounting system, such as Xero, a spreadsheet would be a good way to do the calculations too.
If you would like help setting up your Markup and targets, Contact Us…