In my local High Street there are two shops sharing a building (a little like being in a semi-detached house) one is a dress exchange and the other is a running-shoe shop.

 Last week both shops put new signs on their doors. The dress exchange announced that they would ‘now be open on Sundays’ whereas the running-shoe shop announced that it would ‘no longer be open on Mondays’.

 Intriguing. Why did one shop decide to extend its opening hours while the other decided to reduce them?

Is it profitable to open?

Clearly you should (with a few tiny exceptions which I have jotted down at the bottom) only open your shop if you expect to make a profit doing so. But how do you calculate the profit? Many retailers get this calculation wrong, with dire consequences.

So I thought today we could look at the easy way to do it.

1.Collect some information

Start by collecting some information: your ‘daily opening costs’, ‘daily revenue’ and your ‘average mark-up per sale’:

Daily opening costs

Daily opening costs are the costs that you only incur if you actually open the shop. The biggest cost is usually wages for the sales person. There are usually a few other smaller costs such as lighting but if they are tiny feel free to ignore them.

You don’t need to worry about the cost of rent etc because you are paying that whether you open or not.

Daily revenue

This is very simply your daily takings, before you take anything out of the till!

Average mark-up per sale

If you use a standard mark-up, for example you always set the selling price at twice the cost of the goods, then the standard mark-up is also the average. (If you are puzzled by mark-ups then take a look at the post below this one)

If you use different mark-ups (or if you have discounted some of your prices) then you need to do a little calculation to get to the average average mark-up.

The point to remember here is that your calculations don’t need to be perfect – so don’t be put off - they just need to be near enough. 

The way to do it is this:

Take a look at your past daily sales to get an idea of the mix, so for example you might see that roughly 80% of your sales are at a mark-up of 50% and the rest are at 30%.

Then do a calculation to work out the average, so in this case your average mark-up will be:

(80%* 50%) + (20% *30%) = 46%

This is just saying that 80% of the goods sold are marked up at 50% and 20% of the goods sold are marked up at 30% so the average mark up is 46%

2. Do a calculation: converting mark-up into margin

The next step is to calculate the gross margin percentage. The margin is the percentage of revenue that is profit.

I talk about mark-ups in the paragraph above because that is the way that most retailers calculate their prices; they take the cost of the goods and they mark-them-up by a standard percentage.

But the mark-up is based on the cost of the goods sold. What we want is a formula based on revenue, because, after all, that is the number that is we have close at hand as soon as the shop is closed.

To convert your mark-up into a margin percentage you do a calculation like this:

Let’s say your mark up is 40%, so if your cost of goods was $30 your selling price would be 1.4* 30= $42

So your profit (your margin) would be $42-$30= $12

So your margin percentage would be profit/revenue=12/42 = 28.6%

It doesn’t matter what you pick as your starting cost of goods, if you follow this little process you will always get to the margin percentage.

So why do we need a margin percentage?

Because once you have worked it out, you don’t have to work it out ever again (phew)! So at the end of every day, when you want to calculate the gross profit, you just do this:

Margin% * daily revenue=gross profit.

So if your daily revenue (takings) were $1000 you would know that you had made 28.6% * 1000= $286 gross profit.

3. So should you open your shop on a Monday?

Imagine your daily operating costs are the salary of one employee, and she is paid $30 per hour for 8 hours. The cost is $240.

In the example above, your gross profit is $286. If you then deduct the daily operating costs of $240 you will see that you make a profit of $46 when you open. That’s ok.

But what if your daily revenue for a Monday was just $500? Your gross profit would be (28.6% * 500) $143, but your costs would be $240. You would make a loss of $97. Not worth opening?

So why did the running-shoe shop feel the need to close on Mondays when the dress exchange found it profitable to open every day?

It is possible that the running shoe shop simply sold much less than the dress exchange. But I think it has more to do with the mark-up that both shops use. The dress exchange always charges a 100% mark-up. Even when they discount their product they retain the same margin (they just pay less to the person for whom they are selling it), whereas the running-shoe shop charges a 65% mark-up at best, and sells a number of styles at a mark-up of just 35%. Their average mark up is something like 45%

So both shops need to cover the $240 cost of sales staff. But to do that the dress exchange needs to take daily revenue of at least $360 whereas the poor old running-shoe shop has to take daily revenue of at least $405 (12.5% more than his neighbour). It makes a difference.

Times to ignore the advice above!

A final word…

When you are a new shop building your trade it probably pays you to be open as many days as possible, even if it’s costing you.  Consider the loss you are making as a marketing cost.

If you are very strapped for cash and need to pay a supplier your best bet may be to open the shop simply to get cash flow into the business (provided the daily takings are more than you are paying your shop assistant). Do remember though that you are opting for cash now at the expense of profit later.

Lots of people get terribly muddled about the difference between mark-ups and margins.

Mark -ups

Think of a mark- up as the amount that you add to the price you have paid for your product to get to the selling price.

So you might say I am going to mark up this teapot by 100%. This means that if the teapot cost you $10 you are going to add to on another $10 to get the selling price.  The selling price is $20, the mark up is $10 and the mark-up percentage is 100% of the original cost

Alternatively you might mark-up the teapot 50%. This means that if the teapot cost you $10 you are going to add on another 50% of the cost ($5) to get to the selling price. The selling price is then $15, the mark-up is $5 and the mark-up percentage is 50%.

If you like formulas, the formula to calculate the mark-up percentage is this:

(Selling price - cost price)/cost price

Gross Margins

Mark-ups are useful when your starting point is the cost. But often you want to look at your revenue figure and calculate what percentage of that is gross profit (gross profit is the profit figure before you deduct all the stuff like overheads, marketing costs, salaries etc)

Think of the gross margin as the amount of (gross) profit included in revenue.

So if you sell a teapot for $20 and you know the gross margin is 50% then your gross profit is 50% of $20, which is $10. Likewise if you sell a teapot for $15 and you know your gross profit margin is 1/3^rd then you know your gross profit is $5.

If you like formulas, the formula to calculate the gross margin percentage is this:

(Selling price - cost price)/selling price

Spot the difference

Can you see that how different the percentages are for a mark-up and a gross margin.

A teapot that is marked up 100% will have a 50% gross margin.

A teapot that is marked up 50% will have a 1/3^rd gross margin

And that is why it is so important to get it right.

Not surprisingly business owners get confused but in doing so they can misunderstand their business, and make shocking decisions. The most common mistake is see is people thinking that if they have marked something up by 50% that 50% of their revenue is profit, but it’s not. It’s just 33.3%. Quite a difference.

More on this is the next post.

“If you and I agree all the time then only one of us is necessary” I stumbled on this anonymous quote and love it. It neatly encapsulates the necessary tension between two business partners, a boss and her staff or indeed a husband and wife.

The best businesses partnerships I have seen are where two very different people have come together. Maybe one has a marketing background the other financial, or a people person and a strategist. The point is that they complement each other, one is strong where the other is weak, and yes of course they argue.  But it’s good arguing, it gets a better result.

 

A great example of this is in the movie The September Issue. For most of the 90 minute film Vogue Editor –In-Chief Anna Wintour is sparring with Vogue’s Creative Director Grace Coddington. The tension between Coddington’s artistic talent and Wintour’s business brain is palpable, no more so than when Coddington has sweat blood and tears to produce a photo shoot which Wintour proceeds to throw out. Even just looking at them you can see he two women are poles apart (Coddington is sensible shoes and no make-up, Wintour is perfectly put together) but as a combination they are so powerful that they have sat at the top of the $300 billion fashion industry for 20 years.

 

One of the reasons that I like the example of Wintour and Coddington so much is that they are women. In my experience, and I am prepared to be vociferously challenged on this, women are far more likely to start a business with someone that they are very similar too, than someone who is their opposite.  I few years ago I spent some time with a business run by two friends, Penny and Amanda. They were both great ideas people but absolutely hopeless at execution. The business was on its last legs when Penny decided to exit it. She sold her share to Sarah, a women Amanda disparagingly described as “so not me”.  But the unlikely combination turned out to be perfect; Sarah wasn’t going to set the world alight with her ideas but boy, she was good at getting things done.

 

So if you are in business with a partner, thinking of starting a business with a friend or working closely with an employee ask yourself “do we agree all the time?” And if the answer is yes, it could be time for one of you to go.

Here's a podcast I did with Phil Dobbie from BTalk:


This is how Phil pitched it:

"Do good cooks make good business people? That might be a big call, but perhaps there’s some commonality in the learning curve of trying to master each of them.

Julia Bickerstaff from The Business Bakery says people often go into business without understanding the science that lies behind it. Baking, she says, is the same. It needs some mathematical respect. Too much of one ingredient can kill the taste just as it can destroy a business."

If you've got time take a look at BTalk. I have listened to a number of their interviews and found them thought provoking and laden with content. Best of all they are short and converstaional. I like to listen to them while processing other stuff....like folding the ironing or indeed, cooking dinner!

I don't think I am overstating it when I say that this book has caused a revolution in my life. Gone are the reams of to-do lists and instead I am mega organised with easy-to-do 'next steps', project lists and so much more. For the first time in what seems like eternity my brain feels a lot freer. Wow! This book is not a light hearted look at getting organised but a serious masterpiece by the productivity guru David Allen. It's not a tough read but if you want to get results you must commit to following the guru's advice.

To be honest I had this book on my "must read" list for about a year before I got to it, I wish I hadn't waited so long. It's a gem.

You can buy it here by clicking on the pictures below:

In Australia:


In the UK:

I've just finished my BAS, I'm a qualified accountant so I shouldn't grumble but to be honest I used to find MYOB torture (and Quiken and all the others). About 6 months ago I started using SAASU and I love it. If you are not very accounting/numbers minded this is for you. It's intuitive, it speaks in real english and it assumes you know absolutely nothing about the curious world of book keeping. I suggest you have a go with this. Even if you then decide to hire a book keeper (a decision I recommend when you can afford it) you will have a much better understanding of what they are doing for you and you can steer them in the right direction when it comes to 'expense categories' and other useful stuff.

You can give SAASU a go for free by clicking here and do let me know how you get on.

Here is a fabulous discovery, an online whiteboard. Perfect if you like to think while you doodle or if you like to draw and share your ideas.

It's free, it's fun, it's simple. Here's the link. www.imaginationcubed.com

And you can share your whiteboard with friends, clients and employees simply by emailing...and they can edit, annotate or simply scribble on your masterpiece!

Here's a link to a video I did for the guys at Boardroom Radio. In it I talk about building businesses, my career, mentors and other conversational stuff. It's part of a series on "Innovative Women". Take a look at the other videos in the series they are fantastic and well worth a watch.

Notebook Magazine August 09

I am an enormous fan of Seth Godin. In this two minute video here he talks about the value - or otherwise - of social networking.

It's fun to play around with social networking, but if you are running a business how much is it costing you to add new friends and keep up with old ones?

Try this exercise....

Start by giving your time a cost, an hourly rate. I talk about how to do this in "How to Bake a Business" but here's a quick snapshot. Take the annual salary that you could get as an employee and divide it by 1920 (40 hours a week for 48 weeks). So if you could earn $70,000 in employment land your hourly rate would be $36.46.

Then grab a diary for a week (or just a couple of days if a week is too long to bear) and make a note of how much time you spend on social networking. Write it down as you do it. If you leave noting it until the end of the day you will be enormously inclined to under estimate it (as when keeping a food diary as a prelude to a diet).

Now add up the hours you have spent on Social Networking.

Armed with your total social networking hours, multiply it by your hourly rate. The result is the cost to you of social networking over the diary period.

If that doesn't alarm you, calculate what it is costing you over a year.

Yes it's fun, yes it can make good business sense. But yes, social networking comes at a cost!