In the real world I am a comptroller - I have worked in many fields,
real estate, manufacturing, retail.
Rule of thumb across all of these fields is that after you consider
all of your Cost of Sales (all of those direct expenses involved in
the manufacture/sale of a piece) and all of your Indirect Expenses
(Office Supplies, Advertising, what you typically think of as
Overhead, plus those unexpected expenses everyone gets hit with) you
should end up with a MINIMUM of 42% profit.
How to compute this:
([Cost of Sales]+[Indirect Expense])X 1.42 So that if my materials
and labor cost $50 and my indirect expenses are $25, I need to sell
the piece for AT LEAST $106.50.
Always remember that “down time” is an indirect expense.
Since materials costs flucuate, I suggest always taking the higher
cost. If prices have recently come down, you need to use the higher
cost you spent on the materials. If prices have recently gone up,
you need to take the higher price of your replacement materials.
42% is a minimum figure to shoot for, and it only works if you can be
accurate in what your costs are. Yes, there are many fine computer
programs available, but I learned bookeeping the old fashioned way -
a pencil, an adding machine, and a legal pad. I honestly think that
most small one or two person businesses would be best served by
actually computing the numbers themselves. This leads to an
understanding of the process, and highlights any obvious
discrepancies. The McBee One-Write Systems are outstanding for this
purpose. As the business grows, then a computer program becomes a
useful tool that is worth the expense.
This letter has grown out of control in length, but as I learn so
much from Orchid, I would love to give knowledge back in my own area
of expertise. Anyone who wishes specific help or answers is free to
email me directly and I will do what I can.