What's your G.P. (gross profit)?
So, our excitement turned to apprehension when a new signup rang us and was a little out of sorts. When we enquired as to what was wrong he said he had a big problem with Prepsheets. Ok we said, what's the problem? Well, he informed us, he had put in the ingredients to a retail product he sells in his café, put in the selling price of €9.00 and Prepsheets was telling him his g.p. was 64% but he needed it to be 70%. Oh we said, we're not sure that's a Prepsheets problem - let's look at your product and see what we can do as you are not achieving the necessary margin for your business. We sort of forgot about this incident when another new client rang us to say that the margin showing in Prepsheets did not match her calculated margin. Oh we said (again), and she said that her ingredients cost €0.50 and she sells the product at €1.00 so she was making a 100% margin. We had a chat and explained that no, she was making a 50% margin.
This brought Tara back to 1998 when we first opened our restaurant and she could not get her head around g.p. - it can be confusing. So, we have drawn up this little explainer and are highlighting to our customers the importance of really understanding the g.p. on every item of food and drink you sell.
So, when you sell a scone you need to include the cost of the extras in your costs, like butter, cream, and of course jam. The same for your teas and coffees - average the milk and sugar allocations to ensure you cover all your costs. If you are mainly a takeaway business you need to include your packaging costs as part of your costing.
In our example here our scone is selling for €3.20. It's really important that we remember to subtract the VAT from this to know exactly what our business is getting for this scone. We also need to subtract the cost of the scone (this is just the ingredients cost at this stage) so now we are left with €2.14 of that original €3.20 that goes to the company. Nice I hear you say, but now we need to subtract all the other costs to get our PROFIT! This is where it gets finicky and if our original g.p. wasn't enough, we could end up with no profit after all the other costs. I have allowed for a tough-to-achieve 35% labour cost - do you know what yours is? If not, ring your accountant now or calculate it from your accounts package:
(Total salaries (including all ER PRSI, accrued holiday and sick pay) / total ex-VAT turnover) × 100
Then you need to know the other costs in your business, and these are everything from marketing, office and admin costs, rent, rates, utilities, insurance etc. Again, you should have this but if you don't, ring your accountant to find out or go to your accounts package and calculate them as a % of your turnover.
In our example they total 32.25%.
Leaving our business with a profit of 8.63% - which is quite good for this industry. However, at €0.24 cent profit per scone there is not a lot of wriggle room for overspending and we need to sell a lot of scones to make a profit (€8,630 profit for every €100,000 in turnover).
Our customers don't have to worry about calculating their ex-VAT margin and recalculating it every time there is a price change on one of their ingredients - Prepsheets does it for them.
If you would like to discuss your margin with us, drop us a note on info@prepsheets.com or book a slot in our calendar.