Can You Really Afford Your Next Big Expenditure?, Financial Management Article - Inc. Article
This worksheet figures out how much you need to increase sales to add an expenditure to your company -- without changing your gross profit margin.
You'll put in:
- Annual Sales
- Annual Cost of goods or services sold (COGS)
- Cost of new expense
The worksheet will tell you:
- Sales increase needed to keep the same gross profit margin.
We asked Norm Brodsky, renowned start-up expert and Inc. answer man, to concoct this worksheet. Brodsky is the founder and CEO of Perfect Courier, a three-time Inc. 500 company, and of CitiPostal in Brooklyn, New York. A popular Inc. columnist, Brodsky says that many people starting their own business don't pay enough attention to, or clearly understand, the importance of determining gross profit and gross profit margin. Profit margins determine a company's ability to absorb increases in overhead. Brodsky can't say it loud enough: the most important goal for any business is keep the gross profit margin stable--never sacrifice the gross profit margin--ever.
As the president of Zog Company, you're thinking of hiring a salesperson, at a $30,000 starting salary, to increase sales of your product or service. (Note, the figure of $30,000 will cover every expense associated with hiring this person, including benefits and travel.) Per Norm's advice, you know it would be a mistake to hire this person if it meant a change in the gross profit margin. What sales increase is necessary to hire your new salesperson and still keep the same gross profit margin?
|ZogCo Annual Sales||$100,000|
|Cost of salesperson||$30,000|
ZogCo's Gross Margin and Gross Profit Margin:
|Sales - COGS =||Gross Profit|
|$100,000 - $ 60,000 =||$40,000|
|Gross Profit/Sales =||Gross Profit Margin|
For every dollar spent on the new salesperson, how much in sales will he or she need to bring in to keep ZogCo's gross profit margin intact?
|(Annual Sales/ Annual Gross Profit) x New Expense =||Amount needed to be brought in and still keep the same gross profit margin.|
|($100,000/$40,000) x $30,000 =||$75,000 in new sales needed|