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Managing a Business without a Masters in Business Administration (3)

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What are your Fixed Expenses.

When Pricing the items you sell and deciding how much gross profit you much make to cover your operating cost, you must take into account your monthly fixed expenses. Fixed expenses in this case are:

  1. Your Rental
  2. Your Loan repayments
  3. Your wages and those of your staffs, if you have any
  4. Utilities Bills
  5. Telephone Bills

Theses are expenses that will keep running even if your business is not active. So even if you decide to close shop for a week, these expenses still have to be paid. maybe you save some on the electrical bills and the Phone bills, but that’s about it.

Pricing Your Items

Lots of new business who are not trained in Business Managing like me and have no prior experience in operating a business, fails to see the importance of those fixed expenses when starting out. They have the notion that they get to keep whatever they make thus they made a mistake of pricing their items to low. For example, if an item cost $50 and they sell it at a 10% profit, they are no going to make enough from their sales to cover those basic Fixed expenses. In fact, they might be even making a loss! Let’s take a look at this scenario. (All Figures are my rough estimates)

Fixed Expenses = $12,000 per month or appx. $400 per day.

Initial Sales per day (might get better as time goes on) = $ 3000.00

Gross profit Per Day @ 10% = $ 300.00

Gross Loss Per Day = $ 100.00

See? In theory you might go and tell everyone that you are making $ 300.00, but in fact, you are loosing $ 100.00. Thee are 2 things you can do to leverage this sad state of affairs. One, you must increase your sales if you don’t plan to increase your price and two, you just increase your gross profit margin to 15% or 20%.

Though it is easier to just simply increase your profit margin and just sit back, it is not always practical. If you sell consumer products like can food or everyday edibles like cooking oil, bread or whatever, increasing your price might just make your customers go somewhere else and kill your business eventually. It is a known fact that consumer items like milk, milk powder, soft drinks and such makes very little money. A can of milk might just bring you 20 cents gross profit, however, this slim profit is offset-ted by the volumes sold.

Specialize items are more lucrative, but like most specialised items, sales are seasonal. Taking a store that sells decorative lights for example. Sales can be dull for a good half of the year when there is no festivities, however the owners manage to keep afloat because these items have a very good profit margin. Sometimes to the tune of 100%. That’s the reason you see most of these shops have Sales during festive periods where prices can come down by 70%!

So whatever you do, set your priorities right. Do you intend to be competitive and make less or do you want it the other way round. At the end of the day, I guess it all boils down to the kind of items your shop sells. If it is a fast moving item, you can price it lower and for seasonal items you might want to price it a little bit higher.

Having said that, you must also be aware of competition in your area. A small difference in prices for the same items can set tongues wagging that you are overpricing your items. In my years of experience, this is one aspect of the retail business that proves to be the hardest to to decide. So I took a concerted decision to priced all items in relation to my expenses and operating costs. If I have to marked my price to make a 20% profit, I will do so. It is illogical to mark down prices just to compete knowing that you will be loosing money if you sell at that price. What I do is to be firm on my pricing, but give value added services where others don’t provide.

Next – What are added Value Services.


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