### Are You Making As Much Profit As You Think?

A common mistake is to think you are making higher profit margins than you actually are.

Let’s say it costs you \$£70 to either buy in or produce what you sell. (This is called COGS which stands for cost of goods sold).

You decide you want to make 30% profit on it.

So you add on 30% of 70 which is 21.

This is called a 30% mark up.

In this case 21/91 x 100 = 23% NOT 30%.

To make 30% gross profit you actually need to mark up by 21  x (100/70) = \$£30.

Now suppose we sell 10,000 of these items.(This is our volume of sales).

Our revenue is now \$£ 100 x 10,000 = \$£ 1 million.

Our GROSS PROFIT is therefore \$£ 30 x 10,000 = \$£ 300,000 equals 30%.

But we have overheads such as rent, rates, salaries and wages, utility bills and so forth.

These add up to \$£ 150,000.

So now our net operating profit is only \$£ 150,000.

We are only actually making 15% Net Margin, (150,000 divided by 1,000,000 x 100%)

What happens if we then decide on a 10% discount?

That won’t make much dent in our profit will it?

How much would our profit fall by?

Price is now \$£ 90

Variable cost \$£ 70

Volume 100,000 (unless we sell more but it would have to be by a lot)

Revenue \$£ 900,000

Gross Profit \$£ 200,000 (33% less)