Improving & Increasing Your Profit
I'm gonna talk about how we can improve this in the second. How can I improve it? So it doesn't have to be 100 units were going to do that. There's no profit in this, by the way. Right? So the next thing we're gonna do is talk about Well, let's put a target amount of profit into the formula. Okay, let's put a target amount of profit into the formula. Something called and this is also in the bonus materials formula, target net income and my covering my costs and generating a reasonable profit. Now you'll notice there's a change to the formula. What I'm going to do, I'm gonna plug in, Ah, profit where the prophet used to be. Zero. I'm gonna plug in a profit. I'm gonna make the profit of $1000 the math is going to change. The math is gonna change. Okay, here comes the math. You'll notice that everything to the left of the equal sign is the same. The number on the right of equal sign. The prophet is now $1000 I'm doing the algebra okay. And again, I'm gonna do it on the board because I sen...
se that there's people out there who may benefit from seeing this all the way through again. 50 minus 30 becomes 20 acts the dollar sign. If I add 2000 of both sides, I'm gonna do it. A little abbreviated version compared to what I did last time that goes away. This is 3000. Okay, divide both sides by 20. This goes here. X equals 3000 divided by 2100 and 50 units. What I just figure out to make $1000 I have to sell 150 units. In other words, the bottom of the slide image must sell 150 units to cover all the costs and her $1000 profit. Okay, I have a question. If you're doing this, uh, your fixed costs are on a monthly basis. If you're doing this to evaluate, say ah project for the week. Would you ever adjust your fixed costs to say that time period for the week Or you just keep it question. Keep it at a month. Great question. Depending on the length of your project, you may change your fixed costs. So if the project you're working on is there were three months and you're going to incur. Let's say you're gonna use lease space for three months to do just one project. You would include three months of fixed, least cost. Yes, you would adjust. Okay. Anything else on that? So now the question becomes, how can I improve my profit using the formula? How can I improve my profit using the formula and what I say is consider under the tip at the top, considering portion of the target net income formula. Okay, let me do a different example. Those of you in the audience could take notes on if you want. I'm gonna change the numbers. I'm going to say my up. My sales number is now $80 a unit. I'm gonna say my cost is still $30 a unit. That's my variable costs. And I'm also going to say that my fixed costs that used to be 2000 went up to 4000. Regardless of what the fixed cost is. It's just the fact that it's one big fixed cost number. And let's say I want to make $ okay, just to give you some different numbers and I'm gonna work through him in a minute. So those of you in the audience have the original example that was in the deck of slides and on the board. And now you've got a second example, right? So how can I How can I make things better? Well, you can sell more stuff. Okay? What if I sell more stuff? Well, if I sell more stuff, I still incur the $30 per unit that I sell. But what about fixed costs? Does that change? By definition, the fixed costs don't change. This gets to leveraging your fixed costs leverage in. Okay. We want to get the most sales out of this. $ as we can. So if you're a plumber in your truck and your equipment on the road driving around is $40,000. You want to do as much plumbing business as you can with that equipment As much plumbing businesses. You can. Why you getting the most out of out of the thing that you asked that you own before it depreciates? Right. So one day you could do is sell more. Because while fixed with the variable costs go up every time you sell one that's cost the very fixed costs do the same. Variable cost changed, fixed cost. Say that's one way to improve. So I sell. I stay on the screen sale. Sell more units while variable costs increase with sales fixed costs do not. So, in my example, if I'm able to you least the studio for $ the more revenue I can produce with studio, the better. So the more work the creative Live could have in these studios and use the assets, which is the studio and all the equipment the better. We call that maximising sales, using the same fixed cost. The plumbing truck example. We called leverage Leverage. I could lower my variable costs. Maybe in my example, with the software, I'm able to negotiate a lower price for that software unit that I sell. Maybe I lower from $30 a cost to down to $25. Example. Up here I'm a photographer and image photography. I lower my photo production costs per unit. Maybe I get a new supplier now. This is another thing that comes up in accounting. You got to be careful with suppliers and vendors because cheaper is not always better isn't whether it's high. People in the audience were shaking their head, whether it's hiring people, whether it's buying goods from a vendor. So if you're making Levi blue jeans and you get a new vendor for your denim that you used to make the genes, if the materials faulty from your new vendor, it doesn't. The fact that it's cheaper doesn't help you, because now the materials damaged may not. So the genes correctly you're having to send stuff back cheaper is not always better now. Cheaper is certainly away to reduce your costs per unit and increase your profit. But you got to think about quality you got to think about is that person you hire or going to show up on time and do a good job? Is your vendor for your blue jeans going to get you the denim To make the jeans on a timely basis? You got to consider those things cheaper is not always better, but it is a way to increase your profit and the bottom one way to increase your profit. The 3rd 1 lower your total fixed cost. You re negotiate your studio lease if you have a studio maybe I go to the client location exclusively and I do everything out of my home. Another friend of mine is in the appraised appraising business. He appraises residential commercial homes when the economy was difficult, you know, 809 2010. He shut down His office started working at home, has struck. Why do I have an office? Nobody ever comes to my office. I always go to where the business is. I don't need office space. I don't need all this space. Okay, so that is increasing profit. Now, I am going to do the math on this one. So? So everybody has another example. A T minus 30 becomes 50 X If I add 4000 teach side. This cross is out. This becomes 6000. Okay, 50 x equals 6000. I got a divide. Both sides by x is by itself Yeah, 120. No, this example is not exactly comparable to the other one that I did Because multiple things changed from here to here. Look at the difference. Okay. Variable costs were the same at 30. Didn't change. Fixed costs went up from 6000 but the selling price went up by $30 a unit, which is why, even with a higher fixed cost, we came out having to break. We had toe only make 120 units sale in sales to get this profit. That's even higher because our price per unit was so much higher. Okay, one more time. Variable costs the same. A $30 a unit piece of software fixed costs. What way up? They doubled from 6000. Well, how is it that I can sell less units and make a higher profit from 1 to 2000? Because the sale price per unit is so much higher. Okay, sale price per unit is so much higher. And as I said, what I've done is I've pulled another hearing. I've pulled documents from there. We are documents from the two books, and I'd like to use some of this in our presentation. So to kind of spur my memory, I've got the detailed table of contents for two for the two books, and I'm going to use this to cover some other stuff, which is great, cause I didn't know if I was going to be able to get to it or not. Okay, let me throw in one other kind of costs. So far, we talked about fixed costs and variable costs. But there's something else called a mixed cost. And the classic one is your phone bill. Oh, here's a grab the first graph of the course. Okay, I'm putting minutes for your phone on this axis, and I'm putting cost on this axis, so maybe you pay $30 a month. You cost is fixed. It's a straight line on the horizontal axis because this is your cost, and when you get the 500 minutes, it becomes a variable cost at two cents a minute. I'm just making numbers up. So it's possible have a mixed cost that makes the break even formula harder to deal with. I really don't have a way of dealing with it in the formula you just saw, but I just want you to know that there's things called a mixed cost that could make this analysis harder. Okay, so maybe those of you who lease equipment released space. There's a guy I know who works at a Panera in ST Louis because I'm always in there and he isn't. He's a drummer in a metal band that actually getting a fairly heavy big following and recording a new album. And he talked about studio time and they worked out a deal with their music studio, where it's a fixed rate. But then, after they use it a certain period, they start to charge him differently. They'll start to charge him for it. I'm sorry it's a fixed rate, so if you guys pay $1000 you can use the studio from 2 to 10 hours and making numbers up. But past 10 hours it becomes a variable rate per hour. See what I mean? Music studio studio times. Very expensive from what I'm told, those of you are in that business, okay? Relevant range. You can only use an asset that you have Salon before breaks down so Christine can only use your camera for so long before it breaks down. Okay, if Candace is selling products that we buy, we've got to use the products for what they're intended. Writer. They break down. If you ask. People in the trades business were there buying nails or hinges or any kind of connector. There's there's only so much force you can put on that piece of material before it'll break and fail. Fail right? You could only drive your car so many miles. So what? I'd like you to keep in mind when you're planning your work. And if you're a filmmaker like Christine that there's only there's only so much stress you can put on the things that you're using before they break down. Now there's a problem when they break down. If Christine's in the middle of a film shoot the film, the camera breaks. That's a big problem. Okay, if you're out doing if you're out repairing people's air conditioning when it's 100 degrees outside, the truck breaks down. That's a problem because you lose business. So a way of describing relevant range. I always called it redlining. You don't want your assets to red line. That includes people you can ask. You could only ask so much of your people number one, and when people are working a lot of hours, I don't care who you are. Your productivity is gonna fall down at some point. There are some exceptions. I know some tax accountants who have the ability to work insane hours doing detail during tax season and their productivity? Never. I think they're. I think they're like robots. The productivity never falls off. It's amazing, amazing. And they're doing detail, detail, detail, detail. But for people and for your assets, please be aware that there's a relevant range that you can use them within. Do your cameras, Christine, at some point, overheat due to shut him down? Yeah, So you got a plan for that? You got a plan for what? I'll call idle time. My son was at home watching Jaws like Text. Me said he was watching Jaws, which is a great movie. I snapped into a theater, I think, I said, when I was 13 years old, I saw Jaws and a theatre. It was terrifying. One of the things they talk about. You could find it on the Web, the making of Jaws, and he did a documentary. It was the first film that was filmed on the ocean because when they were going to make this movie, they assume what, you guys are going to shoot this in a tank In Hollywood, right? Steven Spielberg says no is, by the way, is only 26 years old now we're gonna go filming at the ocean. So we asked Richard drivers to be in the movie and he said, No, I'm not gonna be in your movie. You're gonna film on the ocean. You're insane. I'm not. That's gonna be a disaster. Your film's gonna flop. I'm not gonna be in your movie because you can't imagine all the stuff that was going on that caused all this equipment to fail. It's all in salt water That's damaging new equipment. They didn't account for all the idle time to fix and repair things. All this expensive equipment in the ocean in salt water. You know, there, salt in the air, blowing around. Okay, so please keep that in mind. Where I see this being a problem is that people have their euphoria of getting a new client, and it's gonna be a lot of work, and they don't step back and plan. Okay. Can I really shoot film for two hours? Can I really edit this complicated, You know, project for five hours? Can I really get it done by that date? You got to be realistic. You got to be realistic. Okay? Relevant range redlining. red lining continuing. I'm gonna talk about break even formula just a little bit differently. And again, this is accounting eases jargon e. But there's a point. So what I'm gonna put on the board next, and this has to do with profit. This has to do with profit. Now, this is a different way to get you thinking about this formula to help solidify it. Okay? It's called contribution margin. Another way of solidifying what we've already talked about to try to get that formula kind of embedded in your mind. Another way of saying it is your contribution to profit. This is gonna make sense in a minute. I'm hoping, Candace, if you don't mind, can you give me a retail price for one of the things you sell? 50 bucks. I'm gonna make up number and say that the cost is $40 Variable cost. Okay. 50 minus 40. His $10. Now, let me relate that to what's already on the board. I changed the example. 50 minus 40 is $10. Now there's two things that that $10 contributes to. It covers your fixed costs and if you have anything left its profit, the $10. Sales minus variable costs covers two things. It covers your fixed costs and whatever's left is profit. This is another way of thinking about this formula. So what I'm saying is that Candace, in my example, has $10 per unit left. Okay? And that could go toward two things. Let's say that she has $5 in fixed costs that she has to pay, and whatever is left is profit. Now, I'm gonna make a point here. I mentioned that you shouldn't look at fixed costs. You should only look at fixed costs in total dollars. I'm just saying that this $5 per unit is getting contributed to the $2000 least that she has to pay. Okay, so she's driving down the road. She's thinking about How should I price my product? So image photography, the owner Sarah's driving down the road have sort of price. My product. Oh, I've got that least I've got to pay for its $2000. Well, I know my sales list. My variable costs my cost to create the photo is 10 bucks. I want to keep some his profit. Why don't I put $5 per unit to pay that lease. Okay, this is just another way of laying out the target net income formula. So I'm hoping that between contribution margin and the target net income that you see on the board, that's going to start to make some sense. Yes. So, for instance, I have a lot of friends now who are starting businesses with, like, kind of social justice philosophies, inspection, for instance, like so one give one or right, so one and 10% of each whatever goes to that. So how do you figure out what you need to make and because of that? So if you're talking about, like, one unit one unit really is two units because if you're giving one away said how you calculate all those numbers, then that's great. Does anybody work? Tom's. My daughter goes to school where they're all wore white dresses to graduation, and she got all the girls to work White Tom's. There were 80 girls in the class and all about tops because Tom's donates a pair of shoes to the Third World, I guess right, So there's an example to where you give something away. It's a good question. What I think you would do is if a pair of shoes, if one pair of shoes normally has a variable cost of 40 this would become 80 which means you'd be working at a loss. So somehow you've got to raise the sale price to cover the cost of two shoes so that what you're giving away becomes another cost. Okay, Other questions. So if you didn't get the target net income, you might benefit from thinking about it. This way. This box goes toward fixed costs, and whatever's left is profit. And the question is, Well, for every shoe I sell, how much to my gonna put over toward this fixed cost lease? This is fixed. Maybe think about it that way.