We work with clients on their financial statements to help them understand:
- Gross Profit
- Net Profit
- Breakeven point
- Cash Flow Cycle
We were recently presented with a profit and loss statement like the below:
Sales $11,000,000
COGS $7,590,000
Gross Profit $3,410,000
Fixed Overhead $2,530,000
Net Profit before Tax $880,000
The client’s pipeline for work was still very strong, but they had noticed a decrease in demand for their services.
One idea was to reduce their prices to become more competitive. Perhaps a 5% or even 10% price reduction.
| 5% | 10% | ||||||||||
| Current ($) | Proposed ($) | Difference $ | Difference % | Proposed ($) | Difference $ | Difference % | |||||
| Sales | 100,000 | 100% | 95,000 | 100% | 5,000 | 5% | 90,000 | 100% | 10,000 | 10% | |
| COGS | 69,000 | 69% | 69,000 | 73% | - | 0% | 69,000 | 77% | - | 0% | |
| Gross Profit | 31,000 | 31% | 26,000 | 27% | 5,000 | 16% | 21,000 | 23% | 10,000 | 32% | |
| Overhead | 23,000 | 23% | 23,000 | 24% | - | 0% | 23,000 | 26% | - | 0% | |
| Net Profit | 8,000 | 8% | 3,000 | 3% | 5,000 | 63% | - 2,000 | -2% | 10,000 | 125% | |
From the above you will see that a mere 5% discount in sales price will reduce you net profit by 63%; while a 10% discount turns the job into a loss with a 125% reduction.
By giving the client / customer a discount of $5,000 you will need to generate extra sales of $18,269 to achieve your original net profit of $8,000.
By giving the client / customer a discount of $10,000 you will need to generate extra sales of $42,857 to achieve your original net profit of $8,000.
| Difference | Difference | ||||||
| Sales | 113,269 | 18,269 | 132,857 | 42,857 | |||
| COGS | 82,269 | 13,269 | 101,857 | 32,857 | |||
| Gross Profit | 31,000 | 5,000 | 31,000 | 10,000 | |||
| Overhead | 23,000 | 0 | 23,000 | 0 | |||
| Net Profit | 8,000 | 5,000 | 8,000 | 10,000 |
Reducing your prices may be a plausible idea but detailed analysis of the effect of your profitability needs to be completed.
If you would like to discuss further, please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.au
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