Updating Your Base Case

If your numbers are out-of-date, you need to update them for what is happening now.

OK a quick example.

Your accounts after adjusting for the correct variable and fixed costs show

  • Contribution 90,000 (on sales of 225,000 i.e 40%)
  • Fixed Costs 40,000
  • Profit 50,000

You had 300 customers who each bought 3 times a year and you calculate your average contribution per transaction to be £100 (the sales value was £250 at 40%).

Imagine it is 8 months since your accounts and you now have 400 customers who have each bought 2.5 times.

If your contribution per transaction is still £100, then you can expect total contribution to be 400 customers * 2.5 transactions * 100 contribution – 100,000 in the eight months…wow annualised that is £150,000 – a huge jump.

I wonder if it is true.

You check your sales values you discover your sales per transaction are only £200 and not the £250 it was.

Using the 40% average contribution from the accounts, it suggests your contribution per transaction is down to £80 from £100.

You think back and remember the supply problems and the times you had to make two despatches instead of one to complete the order.

It makes sense that the sales and contribution per order would go down.

That would make total contribution 400 *2.5 * 80 = £80,000 and annualised at £120,000.

Still a good increase.

To get a feel for how you are performing since your last accounts, you have a choice – to use the contribution percentage of sales or to use your average contribution per transaction.

I recommend you are cautious until you can get your accounts checked and introduce better control systems.

Next look at your fixed costs.

What has changed…where have you increased costs and where have you saved money?

Have you recruited new staff? Has someone left? Find out the difference in costs.

Make an estimate of your new fixed costs and calculate your profit.

It’s not perfect by any means but it is better than not knowing anything.

If things don’t seem to make any sense when you look at your numbers, you should talk to your accountant about introducing a system which lets you know how you are performing.

Return to P1M4 Four Ways To Increase Profit

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