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Thread: Costing for Profit

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    Costing for Profit

    I run a small printing business... What is the correct method of marking up that which i sell? I usually work out what the paper and ink costs me and then add around 50% on as profit but I havent taken other factors into consideration such as utilities, rent, transport etc. How should i incorporate these expenses into my cost and then still add profit to it?

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    More experienced people will hopefully come around with advice, but this is what I do: I work out the actual cost (including raw materials and labour) and then add 30% as an additional overhead for utilities, transport etc.. This is what I consider the cost price. I mark that up by more than 50% but ensure that I am still competitive.

    Make sure you include labour from day one, even if you do it yourself. If you grow and have to employ people, their cost is already included. Do not forget to budget for marketing as well. Never underestimate cost!
    Sometimes the only transport available is a leap of faith

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    Moderator IanF's Avatar
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    Welcome Abdi,
    You need to get a print management program like Quick Easy or Dolphin. Then work out hourly rates for each process as well as throughput rates. There is nothing simple.
    Links Quick Easy
    Dolphin
    You can also look at PIFSA courses
    While some jobs your margin will be high as you do a lot of work on paper and others will be lower.
    Just don't become another statistic about a print shop that closed as the prices did not cover "all" your expenses including a salary for yourself.
    Good luck.
    Only stress when you can change the outcome!

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    IanF thanks so much always for your helpful responses. Actually i do digital printing and generally not too large quantities. I'm trying to keep my cost low so I'd just like an idea of how to cover my cost and make profit and what is the cause of print business becoming a statistic as mentioned above?

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    Diamond Member adrianh's Avatar
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    You need to seperate your costs 2 ways, fixed costs and variable costs.

    Fixed costs



    -
    These are the known monthly expenses, salaries, electricity, insurance, petrol etc. - these are those essential costs that you cannot avoid...
    Work out how much this is ie. R10,0000

    Now, this is the basic amount of income above variable costs that you have to get in to make a living. So lets say you just buy and sell. If you buy a product for R100 and you sell it for R150 then R50 goes towards this fixed cost figure. So, in thos case you would need to sell 200 units at R150 each to break even.

    Now for the rub...variable costs








    ----
    Lets say that to buy the product for R100 and sell it for R150 you need to spend money on postage. Each item you sell incurs this cost. But, lets say you ship 50% of your stock by a low cost courier, this cost is incurred at a different rate.

    So, you have to be aware of thr minimum amount of "profit" you need to make off your work to cover your basic costs but you also need to keep in mind what it takes to make your money.

    Lets say you get an order to print 20,000 pages of unique information. Lets say you will make, say 50c a copy. Now you need to figure out how much time it will take to make 20,000 individual copies, you need to calculate whether doing so is worth your time.

    What is your time worth - given that you need to make R10,000 to cover your costs (of course one should extrapolate this to and profit) so lets say you need to make R12,000.

    Now, there are about 175 hours in a month so R12,000 / 175 = R68.59. So, if you are going to get by then you need to make this figure every hour.

    Ok, so now you know that you need to bring in R68 per hour. How many pages can you print in an hour, how much does each page cost to print and what can you charge. Now remember, you need to bring in R68 plus the actual printing cost before you break even. If you can't reach this goal at your price then you need to revise your price or your production method or lower your costs. Compare your price to market relaed prices, if your calculation comes out below theirs, 5hen you have room to make some money, if your price is way above theirs then you should consider canning the particular service.

    Do this exercise with each of your products / services. You will be able to figure out what service brings in the most money for the least effort. Drive those services and tolerate the lower income services until you can dump them.

    The most important lesson that I have learned about doing business then is this; You have to understand your numbers, 99% of entreprenuers don't and that is they main reason why they don't get financial backing.

    I know that what I have just written is very simplistic, but the bottom line is that you have to understand what costs you need to cover so that you can work out a basic hourly rate that you can then use as a basis to calculate your required hourly income per service. I was shocked to see that some of my services were costing me money, it would actually be cheaper to sit and watch videos than to perform these services. Low profit, high volume labour kills the little guy, go for high profit low labour jobs. The best jobs are those that you can put onto a machine at high profit and leave to complete by itself. It frees you up to spend your time on doing other profitable endevours.
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    Moderator IanF's Avatar
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    abdi
    Here are some good tools to download. http://www.quickconsultant.com/downloads.html they will take some time to use and understand.
    To avoid being a statistic you need to understand your costs including your fixed cost and required profit. You will always get customers who say your paper and maintenance is only say 15c so they only want to pay 22 cents. Now is that 7 cents enough to cover your overheads and pay for a replacement machine? But you are quiet and desperate so you sell the 1000 copies at 22c. Now the rub comes and they want the next job of 2000 copies at 21c as they want volume discount and so they push until you find yourself working for nothing. So then you get gatvol and price at 30c which does give you a decent profit and poof they are gone.
    What I said in a round about way is if you get the job on price you will lose it on price so it is not viable in the long term. Unless you want to build up to a shop doing a million prints a month.
    Also always factor in wastage. Your machine will jam or run out of toner on a big job and you only find out when you pack the printing. I still learn every day.
    Good luck and keep on asking questions.
    Only stress when you can change the outcome!

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    Gold Member Singhms's Avatar
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    Abdi, all very good advice above.

    Also very important is to make sure you keep financial records and have monthly management accounts drawn up. Even if it is done by yourself.

    As it is very important to have proper profit calculations, it is equally important to have monthly financials to see if you methods of calculating profits in theory actually is working correctly in practice. This also gives you the opportunity to evaluation how much of wastage you have theory vs actual as well as pick up items like stock theft and possibly staff not having the proper knowledge\training to handle certain types of jobs leading to excess wastage.

    Most business people do not have monthly financials\management accounts made especially new businesses. This is a huge mistake as you cannot see if your business is actually performing the way you planned and make the necessary adjustments.

    Hope this helps.
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by adrianh View Post
    Now, there are about 175 hours in a month so R12,000 / 175 = R68.59. So, if you are going to get by then you need to make this figure every hour.
    I always assume some non-billable hours for fixed cost portion purposes. I assume 120 billable hours per month out of an 8 hour working day - which would translate to R100 per hour in the above example. However, I am in a different industry, so your billable to worked hours ratio might be different.
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member adrianh's Avatar
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    I agree with you about the actual number of hours worked, it is always lower than one assumes. The most important lesson that should be taken from my posting is that one should first establish what your actual costs are and use that as a minimum hourly rate. Then one should play with services and products to get the best return per unit time. This game can be played very effectivly on a spreadsheet and you are free to find the best plan. I agree with singhms, you have to document your plan, then document your reality and compare the two. If you keep doing this then you will be able to tweak your plan in relation to your historical data. Maybe you thought service A would sell and service B wouldn't in the plan when in actual fact the opposite happened. It would be foolhardy to continue promoting product A instead of product B. So you change the plan and record what really happened. If you keep on doing this then you will be able to see where your reality differs from your plans. You will be surprised at how things pan out different to how you assume they would.
    How easily someone is offended is directly proportional to how stupid they are.
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    I ran consulting business. And i can say undoubtedly that experienced people will hopefully come around with advice, but this is what I do.... i mean i kind of advise them and they consult with me about their financial as well as business problems so that i can give them efficient and the techniques that can really cause an impact on his business..

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