Finance: Saving graces
Carefully looking after the pennies could end up earning you a luxury cruise. Colin Marsters explains just how to save that much every year.
After every round of price increases from suppliers, the poor old licensee is faced with the same difficult questions. Can I afford to pass on the increase to my customers? Can I afford not to? Is there any situation in which subsidising my customers is worth the price of their loyalty?
The simple answer is that even the smallest subsidy could cost you the price of a luxury holiday every year. Pennies mount up in busy pubs. Take the last Budget increase of 1p a pint. If you are aiming at a 55 per cent margin on your beers, you need to increase the price by 3p in order to maintain your gross profit percentage. Remember - you still need to make a profit on that 1p and charge the increase in VAT.
The Chancellor didn't increase the price of a pint by 1p. In fact he increased it by 1.175p, and while your customers might be valuable to you they can't expect you to subsidise their pint.
You may want to protect your loyal customers from the increase - at Innprofit we still get calls from licensees who say they can't put their prices up again so soon.
But look what happens if you don't pass the increase on.
The table below sets out in black and white just how drastically a mere one per cent fluctuation in your gross margin can affect your profits. For example, if you have a retail take of £3,500 per week and your targeted gross margin is 46 per cent, the goods you sell will have cost you £1,609. This will give you a gross profit of £1,370.
But if you sell those same goods at retail prices that give you one per cent less gross profit at 45 per cent, your retail take will be £3,437 and your gross profit will drop to £1,316. This may not seem a staggering difference but that £54 loss per week amounts to £2,808 a year.
If you work on a net profit of 11 per cent on a retail take of £3,500 per week a drop of one per cent means the loss of more than eight weeks' net profit per year. Put another way, that's two months a year working for nothing - or two weeks' gross profit down the drain.
The good news is that it works both ways. If you take those same goods that cost you £1,609 but instead of selling at one per cent under budget you sell at one per cent over - 47 per cent - that two per cent difference will give you a retail take of £3,567 and a gross profit of £1,427. The difference will make you £111 a week, or £5,772 a year, extra.
The bigger your business, the greater the difference. For instance, if you have a weekly take of £7,000 the two per cent difference amounts to a staggering £11,492 per year.
You could do a luxury cruise for that.
But if you have not got the right level of gross profit you will never achieve it in your net. A drop of one per cent in your GP will result in a considerably higher percentage drop in net profit. For example, if you are making 11 per cent net, a drop of one per cent in your gross profit represents a drop of more than nine per cent in your net profit.
Making profit is all about percentages. You need to set yourself a minimum target for your GP percentage that will, on your expected turnover, produce sufficient profit to pay all your expenses, give you a return on the capital you have invested and pay a salary for the hours you have put in.
Having set the GP, controlling your expenses is the next priority to protect your net profit.
Take staff costs. These should be set as a percentage of turnover (calculated as sales less VAT). Our local sets the barstaff costs at 12.5 per cent and catering staff costs at 27.5 per cent. Set your percentages and stick to them.
While we are on the subject of staff, when prices change and if you don't have an itemised till make certain they all know about it. Staff consistently selling a high volume line at an old price can seriously affect your GP.
Finally, don't wait for the Chancellor's red box before you consider a price rise. Monitor prices throughout the year and never let increases wait.
You may think you are doing your regulars a favour but when you finally have to bow to pressure and pass them on it will be far more difficult to do it without alienating your customers.
And don't rely on what the pub up the road is charging. The licensee there might be getting it wrong and neither of you will be bumping into each other on that luxury cruise.
- Colin Marsters is a founder of the Innprofit Company which produces the Innmate profit ready-reckoner for the licensed trade. For information go to www.innmate.co.uk.
