Finding More Net Profits From Your P&L

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Finding More Net Profits From Your P&L with DavidPresented by Dave Ashcraft
(Business Resource Services)
and Scott K. Wilder (Intuit)

Published in: Business, Economy & Finance

Finding More Net Profits From Your P&L

  1. 1. Profit Mastery: Unlocking More Hidden Profits from your QuickBooks Presented by Dave Ashcraft ashcraft@brs-seattle.com Business Resource Services Seattle, Washington December 3 rd , 2008
  2. 2. What You Will Learn 1. 4-Step Process to perform Price/Volume/Cost Analysis 2. How changes in pricing affect the sales volume needed to break-even 3. How to determine contribution Margin
  3. 3. Why Businesses Succeed 1. Plan properly before start up 2. Monitor financial position 3. Understand the relationship between price, volume, and costs 4. Manage cash flow 5. Manage growth 6. Borrow properly 7. Plan for transition
  4. 4. What Types of Questions Can Break-Even Answer? <ul><li>If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even? </li></ul><ul><li>If I lower prices how will it impact Break-Even? </li></ul><ul><li>If I raise prices how will it impact Break-Even? </li></ul>
  5. 5. The Key to Break-Even Analysis <ul><li>Know Your Cost Structure! </li></ul>So you can effectively react to changes in your business <ul><li>Pricing </li></ul><ul><li>Volumes </li></ul><ul><li>Costs </li></ul>
  6. 6. <ul><li>Sales </li></ul><ul><li>COGS </li></ul><ul><li>OE </li></ul><ul><li>Net Profit </li></ul>Accountant’s P&L Understanding Contribution Margin
  7. 7. <ul><li>Sales </li></ul><ul><li>COGS </li></ul><ul><li>OE </li></ul><ul><li>Net Profit </li></ul>Sales Accountant’s P&L Managed or Break-Even P&L -V C “ What’s Left” -F C Net Profit Understanding Contribution Margin
  8. 8. <ul><li>Sales </li></ul><ul><li>COGS </li></ul><ul><li>OE </li></ul><ul><li>Net Profit </li></ul>Sales Contribution Margin Understanding Contribution Margin Accountant’s P&L Managed or Break-Even P&L -V C What’s Left -F C Net Profit
  9. 9. <ul><li>Sales </li></ul><ul><li>COGS </li></ul><ul><li>OE </li></ul><ul><li>Net Profit </li></ul>Sales Contribution Margin With Net Profit at 0, you are at Break-Even Accountant’s P&L Managed or Break-Even P&L -V C What’s Left -F C Net Profit Understanding Contribution Margin
  10. 10. Accountants P&L 3,457,200 3,714,500 3,910,000
  11. 11. Break-Even 4 Step Process <ul><li>Classify expenses as variable or fixed </li></ul><ul><li>Determine Variable Cost Percentage </li></ul><ul><li>Determine Contribution Margin </li></ul><ul><li>Calculate Break-Even in dollars </li></ul>
  12. 12. What Are Variable Costs? <ul><ul><li>Key: Sales Cause Variable Costs </li></ul></ul>Sales Variable Costs Step 1
  13. 13. What Are Variable Costs? <ul><ul><li>Key: Sales Cause Variable Costs </li></ul></ul>Sales Variable Costs <ul><li>Sample Variable Costs </li></ul><ul><li>Materials – COGS </li></ul><ul><li>Freight </li></ul><ul><li>Commissions </li></ul><ul><li>Production Labor </li></ul><ul><li>Bad Debts </li></ul><ul><li>CC Fees </li></ul>Step 1
  14. 14. How Do Fixed Costs Behave? TIME S A L E S FIXED COSTS Manage the Creeper Costs Step 1
  15. 15. How Do Fixed Costs Behave? TIME S A L E S FIXED COSTS Manage the Creeper Costs <ul><li>Sample Fixed Costs </li></ul><ul><li>Officer Salary </li></ul><ul><li>Office Supplies </li></ul><ul><li>Insurance </li></ul><ul><li>Utilities </li></ul><ul><li>Pizza Party </li></ul>Step 1
  16. 16. How Do Fixed Costs Behave? TIME S A L E S FIXED COSTS Manage the Creeper Costs Step 1 $ Capacity $
  17. 17. How Do Fixed Costs Behave? TIME S A L E S FIXED COSTS Manage the Creeper Costs Step 1 $ Capacity $
  18. 18. 3,457,200 3,714,500 3,910,000 Step 1 Separating Fixed & Variable Expenses
  19. 19. Step 1 Separating Fixed & Variable Expenses 3,457,200 3,714,500 3,910,000
  20. 20. 3,457,200 3,714,500 3,910,000 Step 1 Separating Fixed & Variable Expenses
  21. 21. STEP 1 Fixed Expenses: $ Management Salaries & Office Payroll $ Rent $ Depreciation $ Telephone $ Insurance, etc. Variable Expenses: $ Food $ Paper $ Rebates/Reimbursements $ Hourly Wages $ Taxes associated with Hourly Wages $ Royalties $ Advertising (National) = $ Total Fixed Costs = $ Total Variable Costs $ Revenue
  22. 22. STEP 1 Fixed Costs = $1,264,000 Variable Costs = $2,646,000 Sales = $4,200,000 Managed P&L $1,554,000 Contribution Margin
  23. 23. STEP 2 <ul><li>Variable Cost Percentage = ____________ </li></ul>Determine Variable Cost Percentage Variable Costs Sales
  24. 24. STEP 2 <ul><li>Variable Cost Percentage = ____________ </li></ul>Determine Variable Cost Percentage Variable Costs Sales = ____________ $2,646,000 $4,200,000 EXAMPLE
  25. 25. STEP 2 <ul><li>Variable Cost Percentage = ____________ </li></ul>Determine Variable Cost Percentage Variable Costs Sales 63% = ____________ $2,646,000 $4,200,000 EXAMPLE
  26. 26. Determine Contribution Margin Sales %* - Variable Cost % = * Sales % will always be 100% STEP 3 Contribution Margin %
  27. 27. Determine Contribution Margin Sales %* - Variable Cost % = * Sales % will always be 100% STEP 3 EXAMPLE 100% - 63% = Contribution Margin %
  28. 28. Determine Contribution Margin Sales %* - Variable Cost % = * Sales % will always be 100% STEP 3 EXAMPLE 100% - 63% = 37% Contribution Margin %
  29. 29. STEP 4 <ul><li>Calculate Break-Even in dollars </li></ul>Break–Even = _______________________ Note: Turn the CM % into a decimal prior to making this calculation Fixed Costs Contribution Margin %
  30. 30. STEP 4 <ul><li>Calculate Break-Even in dollars </li></ul>Break–Even = _______________________ Fixed Costs Contribution Margin % = ____________ $1,264,000 .37 EXAMPLE
  31. 31. STEP 4 <ul><li>Calculate Break-Even in dollars </li></ul>Break–Even = _______________________ Fixed Costs Contribution Margin % $3,416,216 = ____________ $1,264,000 .37 EXAMPLE
  32. 32. Break Even Break Even Sales = $ 3,416,216 How Much Profit?
  33. 33. Break Even Break Even Sales = $ 3,416,216 Actual Sales = $ 4,200,000 How Much Profit?
  34. 34. Break Even Break Even Sales = $ 3,416,216 Actual Sales = $ 4,200,000 Difference = $ 783,784
  35. 35. Break Even Break Even Sales = $ 3,416,216 Actual Sales = $ 4,200,000 Difference = $ 783,784 X .37 Contribution Margin or “ What's Left” from each dollar in sales
  36. 36. Break Even Break Even Sales = $ 3,416,216 Actual Sales = $ 4,200,000 Difference = $ 783,784 X .37 Operating Profit = $ 290,000
  37. 37. Break-Even 4 Step Process <ul><li>Classify expenses as variable or fixed </li></ul><ul><li>Determine Variable Cost Percentage </li></ul><ul><li>Determine Contribution Margin </li></ul><ul><li>Calculate Break-Even in dollars </li></ul>
  38. 38. What Types of Questions Can Break-Even Answer? <ul><li>If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even? </li></ul><ul><li>If I lower prices how will it impact Break-Even? </li></ul><ul><li>If I raise prices how will it impact Break-Even? </li></ul>
  39. 39. Break-Even If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even? Fixed Costs = $1 Contribution Margin is 37%
  40. 40. Break-Even Fixed Costs = $1 Fixed Costs = $1 CM% 37% or .37 Contribution Margin is 37% If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even?
  41. 41. Break-Even Fixed Costs = $1 Fixed Costs = $1 CM% 37% or .37 $1 = $2.70 37% or .37 Contribution Margin is 37% If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even?
  42. 42. Break-Even Fixed Costs = $1 Fixed Costs = $1 CM% 37% or .37 $1 = $2.70 37% or .37 Contribution Margin is 37% For every $1 of fixed costs eliminated the sales volume needed to break-even is reduced by $2.70! If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even?
  43. 43. Break-Even Fixed Costs = $1 Fixed Costs = $1 CM% 37% or .37 $1 = $2.70 37% or .37 Contribution Margin is 37% For every $1 of fixed costs added the sales volume needed to break-even is increased by $2.70! If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even?
  44. 44. What If ? Fixed Costs = $1 Fixed Costs = $1 CM% 20% or .20 $1 = $5.00 20% or .20 Contribution Margin is 20% If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even? For every $1 of fixed costs eliminated the sales volume needed to break-even is reduced by $5!
  45. 45. What If ? Fixed Costs = $1 Fixed Costs = $1 CM% 20% or .20 $1 = $5.00 20% or .20 Contribution Margin is 20% For every $1 of fixed costs added the sales volume needed to break-even is increased by $5.00! If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even?
  46. 46. What Types of Questions Can Break-Even Answer? <ul><li>If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even? </li></ul><ul><li>If I lower prices how will it impact Break-Even? </li></ul><ul><li>If I raise prices how will it impact Break-Even? </li></ul>
  47. 47. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 Fixed Costs $300,000 If I lower prices how will it impact Break- Even? NOTE: Break-Even Steps 1-3 have been completed
  48. 48. Break-Even P&L B/E Sales ? 100 Variable Costs 63 Contribution Margin 37 Fixed Costs 300,000 Profit 0 % $
  49. 49. Break-Even P&L B/E Sales ? 100 Variable Costs 63 Contribution Margin 37 Fixed Costs 300,000 .37 Profit 0 % $ ÷ STEP 4 Fixed Expenses Contribution Margin %
  50. 50. Break-Even P&L B/E Sales 810,811 100 Variable Costs 63 Contribution Margin 37 Fixed Costs 300,000 .37 Profit 0 % $ ÷ STEP 4 Fixed Expenses Contribution Margin %
  51. 51. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 If I lower prices how will it impact Break- Even? Revised Cost Structure Sale Price .90 Variable Costs .70 Contribution Margin .30 Price lowered 10%
  52. 52. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 If I lower prices how will it impact Break- Even? Revised Cost Structure Sale Price .90 Variable Costs .70 Contribution Margin .30 Variable Costs Sales 63/90 = .70
  53. 53. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 If I lower prices how will it impact Break- Even? Revised Cost Structure Sale Price .90 Variable Costs .70 Contribution Margin .30 Contribution Margin = Sales-VC=CM 100-70=30
  54. 54. Break-Even P&L B/E Sales ? 100 Variable Costs 70 Contribution Margin 30 Fixed Costs 300,000 Profit 0 % $ Price lowered 10%
  55. 55. Break-Even P&L B/E Sales ? 100 Variable Costs 70 Contribution Margin 30 Fixed Costs 300,000 .30 Profit 0 % $ ÷ STEP 4 Fixed Expenses Contribution Margin % Price lowered 10%
  56. 56. Break-Even P&L B/E Sales 1,000,000 100 Variable Costs 70 Contribution Margin 30 Fixed Costs 300,000 .30 Profit 0 % $ ÷ STEP 4 Fixed Expenses Contribution Margin % Price lowered 10%
  57. 57. Break-Even P&L B/E Sales 1,000,000 100 Variable Costs 70 Contribution Margin 30 Fixed Costs 300,000 .30 Profit 0 % $ ÷ Price 10% Volume 23.5% STEP 4 Fixed Expenses Contribution Margin % Price lowered 10% Old Break-Even was $810,011
  58. 58. What Types of Questions Can Break-Even Answer? <ul><li>If I cut or add a fixed cost how will it impact the volume of sales I need to Break-Even? </li></ul><ul><li>If I lower prices how will it impact Break-Even? </li></ul><ul><li>If I raise prices how will it impact Break-Even? </li></ul>
  59. 59. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 If I raise prices how will it impact Break-Even? Revised Cost Structure Sale Price 1.10 Variable Costs .57 Contribution Margin .43 Price increased 10%
  60. 60. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 Revised Cost Structure Sale Price 1.10 Variable Costs .57 Contribution Margin .43 Variable Costs Sales 63/110 = .57 If I raise prices how will it impact Break-Even?
  61. 61. Break-Even Current Cost Structure Sale Price 1.00 Variable Costs .63 Contribution Margin .37 Revised Cost Structure Sale Price 1.10 Variable Costs .57 Contribution Margin .43 Contribution Margin = Sales-VC=CM 100-57=43 If I raise prices how will it impact Break-Even?
  62. 62. Break-Even P&L B/E Sales ? 100 Variable Costs 57 Contribution Margin 43 Fixed Costs 300,000 Profit 0 % $ Price raised 10%
  63. 63. Break-Even P&L B/E Sales ? 100 Variable Costs 57 Contribution Margin 43 Fixed Costs 300,000 .43 Profit 0 % $ ÷ STEP 4 Fixed Expenses Contribution Margin % Price raised 10%
  64. 64. Break-Even P&L B/E Sales 697,674 100 Variable Costs 57 Contribution Margin 43 Fixed Costs 300,000 .43 Profit 0 % $ ÷ Price 10% Volume 13.9% STEP 4 Fixed Expenses Contribution Margin % Price raised 10% Old Break-Even was $810,011
  65. 65. $1 above Break-Even B/E Sales 697,67 5 100 Variable Costs 57 Contribution Margin 43 Fixed Costs 300,000 .43 Profit 0 % $ ÷
  66. 66. $1 above Break-Even B/E Sales 697,67 5 100 Variable Costs 57 Contribution Margin 43 Fixed Costs 300,000 .43 Profit 0 % $ ÷
  67. 67. $1 above Break-Even B/E Sales 697,67 5 100 Variable Costs 57 Contribution Margin 43 Fixed Expenses 300,000 .43 Profit 1 % $ ÷
  68. 68. $1 above Break-Even B/E Sales 697,67 5 100 Variable Costs 57 Contribution Margin 43 Fixed Expenses 300,000 .43 Profit .43 % $ ÷
  69. 69. $100,000 above Break-Even B/E Sales 797,674 100 Variable Costs 57 Contribution Margin 43 Fixed Expenses 300,000 .43 Profit 43,000 % $ ÷
  70. 70. Profit Mastery: Unlocking More Hidden Profits from your QuickBooks HOMEWORK Know Your Cost Structure <ul><li>Review your P&L and separate the fixed and variable costs </li></ul><ul><li>Calculate your variable cost % </li></ul><ul><li>Calculate Contribution Margin % </li></ul><ul><li>Calculate Break-Even for your Company </li></ul>
  71. 71. Thank You! <ul><li>Call or email David Ashcraft in Seattle </li></ul><ul><li>for FREE Break-Even worksheets </li></ul><ul><li>(800) 488-3520 </li></ul><ul><li>[email_address] </li></ul><ul><li>Learn more about Profit Mastery www.profitmastery.net </li></ul>

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