Welcome To

Undertake
Financial Planning
(BSBSBM402A)
Session No. 3
 Introductions

The trainer of this subject is:

Lawrence Hamilton
Mobile Phone : 0428 560267
Home phone : 599 65187
E-mail : lawrencehamilton@bigpond.com
 Preliminaries
The sequence of these training sessions will be:
8 Session 1 Terms & Concepts
8 Session 2 Break Even Analysis
8 Session 3 Setting Prices for Profit
8 Session 4 Budgeting for Success
8 Session 5 Report on Financial Activity
8 Session 6 1:1 Appointments
8 Session 7 1:1 Appointments
8 Session 8 1:1 Appointments
 Training for Today

Setting Prices for Profits

; For Retail & Wholesale – calculating Margin
& Mark-up
; For Services – calculating Hourly Rates
; For Manufacturing – Calculating Unit
Costing
Setting Prices
for Profits
Costing &
Pricing
 Financial Planning
What price .... For who?

What type of business activity will you do?

H Retail / wholesale of products – margin & mark-up
pricing is usually used
# Service business of your time – hourly charge pricing is
usually used
) Manufacturing volumes of a product – unit costing /
pricing is usually used
OR
° Combination of any, or all, of the above – a
combination of the above pricing methods is usually used
Pricing for
Retailers
&
Wholesalers
 Financial Planning
What price .... Wholesalers / Retailers ?

Introduction
For retail business, where physical products are sold,
price is usually determined using:
‰ Margin – the amount by which your selling price
exceeds the cost of the goods, expressed as a
percentage of the selling price (also the Gross Profit
Margin or Contribution Margin per unit)
‰ Mark-up – the amount by which the cost price of
the goods is increased to arrive at a selling price,
expressed as a percentage of the cost price per unit
 Financial Planning
What price .... Wholesalers / Retailers ?

Calculating Mark-up & Margin

 Financial Planning
What price .... Wholesalers / Retailers ?

Relationship between Mark-up & Margin

 Financial Planning
What price .... Wholesalers / Retailers ?

Effects of Discounting
When discounting:
¾ COGS remain the same, but COGs% increases
¾ Gross Profit $s decrease, and CM% decreases
¾ Sales required to reach Break-Even increases –
more dramatically than you may think
You still need to cover the same Fixed Costs
but with a smaller Contribution Margin
going towards those Fixed Costs
Example:
You buy in widgets for $6, and sell them for $10, and last
month you sold 1,000 widgets.
If you offer a 15% discount for the next month, how
many widgets must you sell to achieve the same Gross
Profit.

Last month:
Sales $10,000 (1,000 units * $10)
COGS $ 6,000 (1,000 units * $ 6)
G.Profit $ 4,000

This month: Answer:

Sales $13,600 (1,600 units * $8.5) 1,600 – 1,000
COGS $ 9,600 (1,600 units * $ 6) = 600 units
G.Profit $ 4,000 = 60% more
This table shows
how much more in
units of stock you
will need to sell if
you discount

Example:
You buy in widgets for
$6, and sell them for
$10, and last month you
sold 1,000 widgets.
If you offer a 15%
discount for the next
month, how many
widgets must you sell to
acheive the same Gross
Profit
 Financial Planning
What price .... Wholesalers / Retailers ?

Sales Mix
Most businesses sell more than one product:
ƒ At differing prices
ƒ With differing COGS
ƒ Returning differing Contribution Margins
To calculate your average COGS% & CM%
you will need to include all of your products
(at a given Sales Mix) to calculate your
average COGS% and CM%
Using an example:
 Financial Planning
What price .... Wholesalers / Retailers ?

Projecting profits
If average COGS% &
CM% have been
calculated:
9You can project
profits at set any given
sales volume.
9You can also plan for
your desired profit.
 Financial Planning
What price .... Wholesalers / Retailers ?

Activity

hand out
 Pricing
for
Service
Industries
 Financial Planning
What price .... Service Providers ?

Introduction
There are many different types of service providers
within service industries, but in common:
• Their core business is that they all ‘sell’ their time
• The time taken determines the price of their job
• The price must cover all labour costs & overheads
• They may also use or sell spare parts or other material to
complete a job.
For a business selling a service, you need to
determine an hourly rate to charge the customer.
 Financial Planning
What price .... Service Providers ?

Calculating hourly rate for owner operator

Step 1:
Calculate how many
productive hours are
available per year
for charge out
Remember to allow
for non-productive
time
 Financial Planning
What price .... Service Providers ?

Calculating hourly rate for owner operator

Step 2:
Divide your projected turnover (here @ $74,500) by the total
available hours – to determine how much you must charge
per hour to be able to recover your costs & return your
desired profit

This is only applicable if working at full capacity, and if

using the budgeted costs!
 Financial Planning
What price .... Service Providers ?

Projecting Profit for

the owner operator
If labour is all that is
sold – the projected
profit can be shown
as:
 Financial Planning
What price .... Service Providers ?

Projecting Profit for

the owner operator
If labour and stock is
sold – the projected
profit can be shown as:
 Financial Planning
What price .... Larger Service Firms ?

Covering all costs

Larger service firms employ others to do jobs. It is
necessary to calculate:
‰Hourly rates for workers
‰Overhead charge per hour to cover costs and the
owners income for non-productive hours
You must charge out at a rate to cover all costs –
workers wages, administration, sales and
distribution costs – and your income derived from
non-productive activities
 Financial Planning
What price .... Larger Service Firms ?

An example
Fred and Freda operate a cabinet making business.
• Fred works in the cabinet shop for 50% of his time
• Freda works at administering the business
• They employ 3 Cabinet Makers (Salary = $30,000), 1 Wood Carver (Salary =
$35,000), & 1 part time Receptionist / Clerk (Salary = $22,000)
• Their indirect costs are $35,000 & administration expenses are $20,000
• They estimate that 40% of income is spent on materials for jobs
• Fred & Freda want to draw $40,000 each from the business
• They have a business related loan that is repaid at $500 per month
• Fred has income protection insurance and pays $1,200 annual premium
• They have $50,000 invested in the business and want 8% ROI (ROI)
• They estimate their tax liability at $30,000 (about 25% of forecast net profit)
 Financial Planning
What price .... Larger Service Firms ?

Employee rates
1. Calculate available
hours for charging
out
2. Calculate all costs
of employing the
worker
3. Calculate the
hourly rate
 Financial Planning
What price .... Larger Service Firms ?

Your rate
1. Calculate available
hours for charging out
2. Determine percentage
of chargeable hours
3. Determine your
desired income
4. Calculate pro rata
totals
5. Calculate hourly rate
 Financial Planning
What price .... Larger Service Firms ?

Overheads rate
1. Calculate indirect &
overhead expenses
2. Calculate desired
unproductive owner’s
income
3. Calculate total available
hours for charge out
4. Calculate the hourly
rate
 Financial Planning
What price .... Larger Service Firms ?

Costing a job
1. Calculate materials
2. Calculate labour
3. Calculate application
rate – indirect costs,
overheads & profit
required to pay
owners = $28.30

4. Calculate GST
5. Total the costs
 Financial Planning
What price .... Larger Service Firms ?

Projecting Profits
Projecting profit can
be shown as:

Assumes 40% of sales

is Direct Materials

All calculations are

Ex-GST
 Pricing
For
Manufacturers
 Financial Planning
What price .... The Manufacturer ?

Introduction
When products are produced in quantity for sale,
costing is calculated per unit of production.
This involved calculating:
1. Cost to manufacture
2. Fixed costs
3. Cost per unit
Remember that a unit price remains valid only for a
set rate of production
 Financial Planning
What price .... The Manufacturer ?

Calculating unit costs

Using an example:
ƒ Direct material per
batch of 1000 = $50
ƒ Manufacturing
workers = $100,000
ƒ Administrative staff
= $40,000
ƒ Overheads = $35,000
If producing 1,000
batches / year:
 Financial Planning
What price .... The Manufacturer ?

Costing at different production levels

¾ The variable cost
remains the same per
unit (in theory) If production is reduced to 500 batches:
¾ If production increases,
the same fixed costs are
absorbed by more units –
decreasing cost per unit
¾ Conversely, if production
decreases, fixed costs are And if production is reduced to 1 batch:
absorbed by less units –
increasing cost per unit
167
 Financial Planning
What price .... The Manufacturer ?

Allowing for waste

Often there is some waste of direct materials.
Remember to allow for this waste in your
costing. (Example shows how).
 Financial Planning
What price .... The Manufacturer ?

Projecting your profit

Using your cost per
unit, you can
determine your
profit @ a selling
price
 Financial Planning
What price .... The Manufacturer ?

Projecting your profit

9 If you want to forecast
a desired profit you
can determine how
much you must
charge per unit
9 You can also
determine how many
units must be sold at a
particular price to
achieve your desired
profit
 Financial Planning
What price .... The Manufacturer ?

Activity
End of this Presentation