How to work out profit?

How to work out profit?

Author
Discussion

DamianBlades

Original Poster:

1,935 posts

195 months

Monday 19th October 2009
quotequote all
Hi, how do you go out about working out profit? We are going to open up a cafe soon and need to know how to price things. Is there away to work how much things can be sold for?

I thought the calculation would go

product = x
Worker rate for an hour = x

add the two together then divide how many products you can turn around within the hour then add profit on top? Or am I thinking about it kack handily if not wrong?


Jem Thompson

930 posts

182 months

Monday 19th October 2009
quotequote all
You would need to first work out the costs involved to produce one item of food or drink. Determine the amount of labour needed, the ingredients required, and remember to add a portion of your overheads to the costing too (electricity to run ovens, rent, and so on). It may be easier to do this for a large batch of a product, then divide by the number of servings. Then work out how much profit you want to make and mark the price up accordingly.

Edited by Jem Thompson on Monday 19th October 20:14

Mojooo

12,719 posts

180 months

Monday 19th October 2009
quotequote all
Price of the product x by how many you can sell

Minus all of your costs.



--

Or you could work out all of your costs, how many items you think you will sell and price your product accordingly to reach a sufficient profit.

--



Edited by Mojooo on Monday 19th October 20:14

jeff m

4,060 posts

258 months

Tuesday 20th October 2009
quotequote all
Easiest way is to seperate fixed and variable expenses.
Example of fixed costs: rent, utilities, insurance, pay of others.
Variable costs: raw ingredients.
Your fixed costs will be the same whether you sell one cup of coffee or one thousand.
Raw ingredients will obviously be relative to your sales (hopefully)
Then put in projected sales.

I'm guessing you are at a pretty early stage in this venture.
One other aspect you should look at is cash flow. Learn how to draw up a simple cash flow. It will not be accurate biggrin but it will show you what your bank bal should/may be after one week, one month, two months etc.
Very important with regard to survival.


byhff

228 posts

191 months

Tuesday 20th October 2009
quotequote all
Depending on what you are selling don't forget VAT.

And don't forget that it will change again shortly.

4nonymous

2,920 posts

191 months

Tuesday 20th October 2009
quotequote all
Net or Gross ?

A google of this would have been more than substantial.

Fixed costs
variable costs
break even
gross profit
net profit
turnover
cost of sales
fixed + variable= total costs

It really isn't as simple as , how do I work out profit.

Work out cash flows. How many you need to sell just to break even.

Looking at your OP I assume you are in very very early stages.

Work out or get an idea of all the above. You really must look into every single detail otherwise you are going to leave yourself open to alot of fk ups.





Edited by 4nonymous on Tuesday 20th October 00:36

HiRich

3,337 posts

262 months

Tuesday 20th October 2009
quotequote all
As you can tell from the responses, there is no "right answer" - how you do it depends on what you want to use it for.

In the cafe business you have quite a few costs that are pretty fixed: rent & rates, labour, utilities. Variables for a sinfle meal are the ingredients (and even that doesn't include wastage). The profit figure that really matters is that at the end of the week you have paid all the bills for running the cafe.

So let's take a guess that what you are looking for is a quick check that what you are charging for a meal is greater than the cost of the meal. A fairly common method in higher-end restaurants is to price meals on cost +x%, where cost is just the ingredients. So a bacon sandwich:
  • 4 rashers @ £1.00
  • 2 slices of bread @ 10p
  • 25g butter @ 10p
  • Sauce @ 3p
  • (You might want to add a time element. So 4 minutes to produce: 4/60 x minimum wage = 40p)
Total: £1.23
Cost +100% means a target price of £2.46.

Next, remember that the marketing rule. Price is what you can sell it for, not a factor of cost. So to determine price, you are more interested in what the market can sustain. Your competitors are local cafes, McDonalds, etc. Allow that your bacon sarnie is perhaps better than the competition, and you might decide that the best price is £2.00.

Gross profit is therefore 77p. Of that (depending on the VAT rules relevant) 15% effectively goes on VAT, leaving a nominal gross profit for your calculations of about 65p
You can run quick checks through your menu, but remember this is not your primary aim. The shortest timescale that matters is the week, so you would need to factor up the figures with an estimate of sales:
  • Total sales of bacon sandwiches (plus all other menu items)
  • Total food product orders required (including wastage)
  • Leads to a gross profit figure
  • Deduct weekly fixed costs: rent, rates.
  • Deduct maintenance costs (washing up liquid, etc.)
  • Deduct weekly semi-fixed costs (sort of fixed, but you can do something to manipulate them): labour (inc taxes), utilities
  • Deduct a contribution to your infrequent costs (e.g. accountant, repairmen)
  • Leads to a pre-tax net profit figure
  • Calculate your VAT payable on sales
  • Calculate your VAT reclaimable on purchases
  • Leads to your VAT bill
  • Deduct from your pre-tax net profit figure to give your final, nominal net profit.

Landlord

12,689 posts

257 months

Tuesday 20th October 2009
quotequote all
Typically, you use a rule of thirds. One third is the cost of the "dish", the second third is the cost to produce (staff, lighting, heating et al) and the final third is your profit.

You then work on a gross profit percentage. This should typically be around 66%-73%. GP is calculated by ((Sale-Cost)/Sale)*100

So,

Item A costs £1.00, so sell it for £3.00. This would give you a GP of;

(£3-£1)/£3 = 67%

Don't forget though that out of your £1.00 profit above, you'll be handing over £0.15 in VAT.

Also, in order to get the cost price you may need to "guess" how many portions you'll get from the item. For example, it costs £6.30 to make, you'll get 20 portions, meaning cost per portion is £0.32 - so sell for £1.00 (rule of thirds);

GP = (1-0.32)/1 = 68%

Finally, if you can sell it for more, do! Some items have GPs of over 80%. However, some have less than 66%. You have to make a call on whether your customers will pay what you intend to sell it for.

Edit: To add the 100 multiple for GP.

Edited by Landlord on Tuesday 20th October 11:28

Road2Ruin

5,210 posts

216 months

Tuesday 20th October 2009
quotequote all
You are going about it the wrong way. The first factor you should look at in a new business is the break even point, ie the amount you need to make to pay the business' bills. Ignore the purchase of stock items for this example just concentrate on the fixed bills, rent, rates, heat & light, phone, credit card machine hire etc. Some of these may be guesses by try and overestimate. Once you have done this you will then be in a position to work out the gross profit of your predicted sales, so Sales price minus purchase price (if you buy all your products in this is easy, if not slightly more difficult). Then you need to work out how much you have to sell to cover your break even costs. So if your break even costs are £1000 p/month then you and you need to make a Gprofit of £1000/month. If this all seems feasible then you can start to factor in such things as staff costs, wear and tear etc. When you are finally happy with your figures you can then think about how much more you need to sell to make a nive profit and pay yourselves. (as mentioned before though make sure you remove the VAT on everything if you need to be VAT registered. Oh, and think about doing a cashflow too.

Landlord

12,689 posts

257 months

Tuesday 20th October 2009
quotequote all
Road2Ruin said:
You are going about it the wrong way. The first factor you should look at in a new business is the break even point, ie the amount you need to make to pay the business' bills. Ignore the purchase of stock items for this example just concentrate on the fixed bills, rent, rates, heat & light, phone, credit card machine hire etc. Some of these may be guesses by try and overestimate. Once you have done this you will then be in a position to work out the gross profit of your predicted sales, so Sales price minus purchase price (if you buy all your products in this is easy, if not slightly more difficult). Then you need to work out how much you have to sell to cover your break even costs. So if your break even costs are £1000 p/month then you and you need to make a Gprofit of £1000/month. If this all seems feasible then you can start to factor in such things as staff costs, wear and tear etc. When you are finally happy with your figures you can then think about how much more you need to sell to make a nive profit and pay yourselves. (as mentioned before though make sure you remove the VAT on everything if you need to be VAT registered. Oh, and think about doing a cashflow too.
I have to say I disagree with you. Pricing your items based on how much you need per month isn't giving any heed to the market. I mean, if they decided to sell a bacon sandwich at £1000 each, that would cover their costs and let them sit back. Imagine if they sold two! The simple fact is, there are SO many influences in the sale of discretionary consumables like convenience food that you HAVE to simplify it.

The standard pub/restaurant/other food establishment model is (broadly) the rule of thirds. From that, decide how much you could actually charge (move the price up-or-down) and from that, work out how many you'll need to sell to cover your costs and make a profit. I'm assuming from the OP that they're beyond the stage of working out whether it will work (when fixed costs versus potential sales etc are more relevant) and are now just about to print their menus.

In which case, the simplest way is to use the "industry norm" (IMHO) as your starting point and then adjust from there.

Edit: I should clarify that I only disagree with regards to making the calculations too complex, not that your principles are wrong. They're not!!

Edited by Landlord on Tuesday 20th October 11:43

Tony*T3

20,911 posts

247 months

Tuesday 20th October 2009
quotequote all
Lol, you thought this was a simple question....?????

There isn't a 'profit margin' accross the board. You might make no profit on selling a cup of tea if there are locally competitors that can do it cheaper. You might even sell it for a loss. Mental? not if you can get every third tea drinker to buy a slice of cake that has a 400% profit margin attached to it.


Its not as simple as coming up with a formula. You need to know what you can sell for how much, but more impotantly what people will be prepared to pay for someting in your area. Do you have a 'unique selling point' that means they'll pay more for your tea than at a competitors cafe? Perhaps you have topless page three models serving cuppas? If so, I'd suggest a higher % profit margin on your teas and coffees.

You should know what your total weekly operating costs are (including your own pay!). If you cant sell enough product to cover that then you'll end up working for fek all and perhaps going bust.

Tony*T3

20,911 posts

247 months

Tuesday 20th October 2009
quotequote all
HiRich said:
As you can tell from the responses, there is no "right answer" - how you do it depends on what you want to use it for.

In the cafe business you have quite a few costs that are pretty fixed: rent & rates, labour, utilities. Variables for a sinfle meal are the ingredients (and even that doesn't include wastage). The profit figure that really matters is that at the end of the week you have paid all the bills for running the cafe.

So let's take a guess that what you are looking for is a quick check that what you are charging for a meal is greater than the cost of the meal. A fairly common method in higher-end restaurants is to price meals on cost +x%, where cost is just the ingredients. So a bacon sandwich:
  • 4 rashers @ £1.00
  • 2 slices of bread @ 10p
  • 25g butter @ 10p
  • Sauce @ 3p
  • (You might want to add a time element. So 4 minutes to produce: 4/60 x minimum wage = 40p)
Total: £1.23
Cost +100% means a target price of £2.46.

Next, remember that the marketing rule. Price is what you can sell it for, not a factor of cost. So to determine price, you are more interested in what the market can sustain. Your competitors are local cafes, McDonalds, etc. Allow that your bacon sarnie is perhaps better than the competition, and you might decide that the best price is £2.00.

Gross profit is therefore 77p. Of that (depending on the VAT rules relevant) 15% effectively goes on VAT, leaving a nominal gross profit for your calculations of about 65p
You can run quick checks through your menu, but remember this is not your primary aim. The shortest timescale that matters is the week, so you would need to factor up the figures with an estimate of sales:
  • Total sales of bacon sandwiches (plus all other menu items)
  • Total food product orders required (including wastage)
  • Leads to a gross profit figure
  • Deduct weekly fixed costs: rent, rates.
  • Deduct maintenance costs (washing up liquid, etc.)
  • Deduct weekly semi-fixed costs (sort of fixed, but you can do something to manipulate them): labour (inc taxes), utilities
  • Deduct a contribution to your infrequent costs (e.g. accountant, repairmen)
  • Leads to a pre-tax net profit figure
  • Calculate your VAT payable on sales
  • Calculate your VAT reclaimable on purchases
  • Leads to your VAT bill
  • Deduct from your pre-tax net profit figure to give your final, nominal net profit.
What a load of twaddle. I mean, 4 minutes to make a sarnie FFS..... wink


(only kidding about the twaddle bit btw).

Odie

4,187 posts

182 months

Tuesday 20th October 2009
quotequote all
Simply

Profit = What you sold it for - What it cost you


What it cost you = Includes all expenses involved with producing (manufacturing, tooling, materials, logistics etc) / selling (marketing, labour etc) / buying (product cost, logistics etc) the product.

What you sold it for = The total price your customer pays.

im

34,302 posts

217 months

Tuesday 20th October 2009
quotequote all
Sounds like this thread should really be called 'How to work out a sale price to get a predetermined profit'.

Here's a rough and ready demo.

This is an example of the much under-used facility available in Excel etc - Goal Seeking.

Set up a spreadsheet with the appropriate figures in all of the cells - below is a VERY basic one that shows a net profit of £40.

Lets say you want to make a profit of £60 instead by changing the Sale price of the coffee. Use 'Tools' then 'Goal Seek' to get the spreadsheet to calculate what price per cup the coffee has to be sold for to reach this (£60) figure.



Click OK



Notice its changed the price at which you have to sell the coffee at to £2.20 per cup in order to make an overall Net Profit of £60.

You could equally use the Goal Seek function to change the salaries figure in order to hit £60 Net Profit - then you'd know how much you can afford to pay your staff whilst keeping your Sales price at £2 per cup. Or even how many cups in total you must sell (120 btw) if you want to keep the Sale price at £2 per cup.

As stated, this is a very simple demo of how to use the function to get the result you require - obviously your spreadsheet will have to have a lot more detail than I've put into the above example.

Remember - All prices are net of vat.

bobfather

11,171 posts

255 months

Tuesday 20th October 2009
quotequote all
The Austrian School of Economics teach a very good principle. Do all those things mentioned above to determine the fixed and variable cost of running the business.

Then as a totally separate activity, determine the maximum value that your chosen customer base would give to the items you intend to sell. Once you understand your customers maximum value position you simply need to price a little below this and ensure that this results in a positive financial delta, if the delta is negative then do not proceed with the venture as it is guaranteed to fail.

The principle is that both supplier and customer should sense that they have profited from the transaction. You receive more money than it cost to produce, your customer buys something for less than they were willing to pay, both perceive that they have profited.

Any debate about cost-plus product pricing totally misses the point and fails to maximise your profit. BTW The Austrian School of Economics is world renowned for creating the worlds most wealthy entrepreneurs.

Jgtv

2,125 posts

197 months

Tuesday 20th October 2009
quotequote all
I think you going about this totally the wrong way.
Listen to the advice above and IF you can still think you can make the numbers work, Taking into account you payroll costs, Rent, Rates insurance, advertising, professional fees, tax, loan interest, light, heat and other costs AFTER paying for you supplies and still make a worth while living out of it.

Then work out in relation to the location of your shop how many people pass through there roughly every day, During peak times 6-9 and 12-3, will a large enough percentage of these folks splash out there hard earned on to make it worth your while.

If your figures work out, think about why this place is being made available? has the current owner had enough and jacking it all in OR have they decided they cant make any cash out of it an shifting the dead wood?

On that happy note I will leave you.

mat205125

17,790 posts

213 months

Tuesday 20th October 2009
quotequote all
Total of everything coming into the business through the till, minus every single penny spent out of the business on every conceivable service or material. What's left over is the profit.

BoRED S2upid

19,692 posts

240 months

Tuesday 20th October 2009
quotequote all
What an interesting thread to read everyones different views on the subject. I remember when I was doing my degree a simple computer programme to get our heads around supply and demand and pricing, incorporated everything mentioned above if you sold low you sold everything if you sold high you didn't but profit increased and decreased accordingly.

I have a few things to throw into the pot.

Firstly VAT has been mentioned, for a new business you may not hit the VAT threshold in the first year £50,000 turnover. Your accountant will help with this along the way though.

Secondly as Landlord quite rightly says in this industry your profit margings should be in the region of 60% across the board this doesn't mean everything has to be on a 60% profit basis some items may be trading at a 30 or 40% profit some may comand a larger profit say 70% hopefully it will balance out to 60%. In Landlords case he will find spirits will comand a much larger profit percentage than other lines.

One point you have to bear in mind is your competitors. Who else sells what you sell? and how much do they charge for it?. You can't charge 30% more than them, why should customers buy from you rather than them?.

And finally a little example. A couple in my town opened up a cafe, a greesey spoon type of affair fish, chips and peas for £4.50, Sausage Chips and beans for £3.50 etc... the place was packed to the rafters every day they had a high turnover and probably a low profit margin but the business thrived and they sold it. The new owners went up market, new posh tables and chairs, new menu, more expensive and the business is dead, never a customer. How long will they be able to survive?. Who knows.

Good luck.


lestag

4,614 posts

276 months

Tuesday 20th October 2009
quotequote all
DamianBlades said:
Is there away to work how much things can be sold for?
Three things to add:

1) Walk down the road and see what other cafe's are charging (your competition)
then figure out what it would cost to make each product (as per all the advice in this thread)
2) make sure your portions are consistant - reduces waste and keeps punters happy
3) - allow for shrinkage - if you have any products on display that are likely to be easy nicked

Road2Ruin

5,210 posts

216 months

Tuesday 20th October 2009
quotequote all
Landlord said:
I have to say I disagree with you. Pricing your items based on how much you need per month isn't giving any heed to the market. I mean, if they decided to sell a bacon sandwich at £1000 each, that would cover their costs and let them sit back. Imagine if they sold two! The simple fact is, there are SO many influences in the sale of discretionary consumables like convenience food that you HAVE to simplify it.

The standard pub/restaurant/other food establishment model is (broadly) the rule of thirds. From that, decide how much you could actually charge (move the price up-or-down) and from that, work out how many you'll need to sell to cover your costs and make a profit. I'm assuming from the OP that they're beyond the stage of working out whether it will work (when fixed costs versus potential sales etc are more relevant) and are now just about to print their menus.

In which case, the simplest way is to use the "industry norm" (IMHO) as your starting point and then adjust from there.

Edit: I should clarify that I only disagree with regards to making the calculations too complex, not that your principles are wrong. They're not!!

Edited by Landlord on Tuesday 20th October 11:43
That's not what I said. The point I was trying to make was be aware of how much money you need to make just to break even, not how much you need to sell each item for, that depends on local market forces. You can't sell a bacon sandwhich for £5 if your neighbour is doing it for £2.50 not even if it's twice as good. But so many people go into business not knowing where they need to be, they just think great I am selling £20,000 a month of goods. Also with the standard restaurant model that doesn't work for cafes where there are many doing the same thing, Restaurants tend to be more diverse and therefore can justify differing prices mroe easily. As for the assumption that they have done the basic calculations just read the OPs post again and ask yourself the same question. The OP looks like they need a lot of advice.

Edited by Road2Ruin on Tuesday 20th October 13:29