1. Profitability
By Peter Baskerville
24/04/2019

2. Building your startup Three distinct phases: Build the infrastructure
Build the business (customer acquisition)
Build the profit (owner benefit – management, cost control)
Infrastructure
to make the business fly – CAPEX BUDGET
Business
to attract sufficient customers – CASHFLOW PLAN
Profit
to deliver returns to stakeholders – PROFIT BUDGET

3. Money In … Money Out OUT IN
Goods & services used up to earn revenue = Expenses
Goods & services purchased but not yet used up = Assets
$ from customers who buy our Goods & services = Revenue
$ from investment by the owners in the business = Capital
OUT IN

4. What is Profitability?
the ability to generate revenues in excess of the expenses used up in producing those revenues
a measure of business success
The ability to provide financial rewards sufficient to attract and retain financing – a competitive return on invested capital – sustainability (capacity to endure).

5. Types of Revenue Merchandise sales – retail, wholesale, manufacturer
Service Fees – consultants, tradespeople, freelancers
Investments – shares in businesses, interest on deposits
Other – Donations, government grants

6. Costs – sacrificing cash
Cost Vs Expense
Interchangeable – business and economics. Accounting - specific
Cost = sacrificing resources (money) to acquire items of value (includes CAPEX)
Expense = Using up the value of those items in order to generate revenue for a business
Costs – sacrificing cash
Expenses – used costs

7. Cost Vs Expense Cost per ream – $10
Cost = sacrificing resources (money) to acquire items of value (includes CAPEX) = 6 x $10 = $60
Expense = Using up the value of those items in order to generate revenue for a business = 4 x $10 = $40
Asset = Items of economic value with potential to earn future revenue = 2 x $10 = $20

8. Fixed Vs Variable Expenses
Required for budgeting – cashflow & break-even
Fixed expenses – expenses that DON’T change in relation to sales volume or business activity (rent)
Variable expenses – expenses that DO change in relation to sales volume or business activity (purchases)

9. Direct Vs Indirect Expenses
Costs required to prepare an item for sale (purchases, freight in, direct labour) and which are easily identified as relating to the product sold.
Indirect expenses - Overheads
Expenses that do not relate directly to a specific product and so must be shared equitably between all products produced by the business (Rent, insurance)

10. Profit calculations
Gross profit = revenue less direct expenses (purchases, direct labour)
Operating profit = gross profit less overheads (not including depreciation, income tax or interest) = EBITDA
Net profit = Operating profit less interest, depreciation, extraordinary gains/losses
EBIT = Earnings Before Interest, Tax.
Your Business
Profit & Loss Budget
For the year ended 30 June 2013 $
Revenue
200,000
Less direct costs
100,000
= Gross Profit
Less fixed expenses
40,000
Less variable expenses
20,000
= Operating Profit
Less interest
5,000
Less depreciation
2,000
= Net profit
33,000

11. Calculating mark-up (mark-on)
Mark-up or Mark-on
Used to calculate a selling price
Cost price + (Cost price x mark-up) = Selling price
$10 + (10 x 100%) = $20 selling price
Mark-up = 100%

12. In budgeting we use Gross Profit % Margin
Calculating margins
Used to calculate the amount of gross profit in a sale i.e. What % of the sale is our gross profit?
(Selling price – cost price) ÷ Selling price = Gross Profit (GP%)
(20 – 15) ÷ 20 = 25% GP margin
Sell price = cost price ÷ (1-GP%)
Difference from 100% = Cost of good sold %
In budgeting we use Gross Profit % Margin

13. Applying GP% margins Setting a selling price Given a cost price = $20
Given a targeted GP% = 60%
Selling Price = Cost Price ÷ (1 – GP%)
Selling Price (Example)
= $20 ÷ ( )
= $20 ÷ 0.4
= $50