Margins, Markups, Mixups?

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iorek
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Margins, Markups, Mixups?

Post by iorek »

HI Folks

Hope you're all well.

As a newbie, I'm still getting my head around standard practices and I have a pricing question.

My margins/markups seem low

FRAME COST
glass 32.95
moulding 27.06
mount 13.60
backing 3.13
barrier 2.00
hardware 2.50
vat 16.25
total cost 97.49

SALE PRICE 143.00

profit 45.51
markup 31.83%
margin 46.68%

I'm unsure if I've got margins/markups the correct way round (or even correct). But the idea of essentially £100 of a £150 sale does not seem sustainable to me. Am I wrong?

I use Estlite and think it's great - I'm sure I'll learn to love it once we understand each other a bit more. Could it be that I have set it up wrongly?

Any thoughts would be greatly appreciated.
Not your average framer
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Re: Margins, Markups, Mixups?

Post by Not your average framer »

I see where you are coming from, but making big money on each individual framing job, is not the reality. We all need to be able to spread our oporating costs over multiple framing orders, to make things work. Also we need to be able to turn the framing jobs around fairly quickly to enable us to comlete enough work to create the income required to cover the oporating costs for that period of time. Below a certain amount of throughput of framing jobs, resulting in a certain amount of income, our businesses become un-viable. I was trained at a busy and fairly large framing workshop and at first, I could not understand how these people could work so fast. It took me a long time to come up to speed. Later I started my own framing business and needed to earn enough to make ends meet.

It is then that you realise, that some framing businesses do not always get the same amount of business as some others. If you cannot get enough business in terms of numbers of framing orders, then you have to change your business model to allow for this. It's not just what you charge your customers that matters, but it's also what you have to pay your suppliers as well. Do you imagine that we all think that just following the right prices to charge your customers, will automatically make everything all work out right. Sorry, but it does not work like that. You need to manage your cash flow to ensure that there's always enough cash in the system to keep things alive. You also need to understand the difference between fixed overheads and variable overheads.

Not all expenses and overheads are the same and your options for taking action to reduce these items will need different strategies. What works with one, often will not work with another. I have produced my own spreadsheet to make sense of all this. It is a normally balance sheet, but as it breaks up my outgoing expenses, I can see which expenses are part of earning money and which are just un-profitable expenses. The un-profitable expenses are where you need to minimalise anything which you can, these expenses will not be making you any money whatsoever. regardless of what your income from sales will be, most if not all of these un-profitable expenses are likely to be what is known as your fixed overheads. nearly always you will have to pay these whether you are making any money, or not.

Then there are the things you need to buy to make things to sell. These are your material costs, also known as the cost of sales, how you control these has a big effect on you profitability and this is where too many people get it wrong and wonder why thy are not making any money. Creating profit does not just come from how much you can charge you customers, but from savings which you can make in how much you will be paying for your materials for whatever it is that you make and sell. Having exactly the same mark up of all materials which you buy to make things, makes no sense. lower cost items often require a bigger mark up to cover hidden expenses related to using these items, when compared with higher value items. All materials which you buy, will involves costs in processing and using them.

Variable overheads are the increased level of overheads, which occur as part of you level of working and producing sales. These to need to be kept under control as well, in particular as they are not expenses which you can mark up as part of the material cost of producing things to sell. At the bottom of my monthly spreadsheet, there are some boxes which various percentage ratios and at least one of these will provide you with a key performance indicator.

Your primary key performance indicator is going to be your gross profit. This is your profit after taking your cost of materials, or cost of sales from the value of your sales. This is before any overheads are taken out of your profits and this tells you how much you have made, before paying any overheads at all. You net profits is what is left after paying all the overheads and this includes paying your staff. How good you are at controlling your overheads, will determine how much is left for profits. You will always need to pay your fixed overheads, regardless of if you have any sales, or not. Fixed overheads are always there like it, or not and they will eventually kill your business, if you can't keep paying them. They must always be factored in to the costs which you need to be able to cover in all situations, that is in good times, or bad times.

Cash flow is making sure that you always have enough surplus to pay the bills and keep the business running and staying out of unplanned and unsecured debt. Be sure to look up cash flow and cash flow forecasts on the internet and make sure that you not only fully understand it, but that you manage your cash flow both carefully and properly. Don't consider the prices which your pricing system tells you as something which you cannot fine tune, but understand the reasons why it needs to be fine tuned and where any short comings are occurring. Be careful not to just put up prices without understanding what's happening and pricing yourself out of the market. Price is a very significant part of your business model. It's pointless just putting prices until customers won't pay your prices anymore.

Sometimes you need to make savings elsewhere and the first place to look at to makes savings usually should be to look at the cost of materials, or your cost of sales. If you can reduce you cost of purchasing the materials, which you use to make things to sell it has an immediate effect on your gross profit, then you can move on to looking at you fixed and variable overheads. Our current times are not the most easy of times, which probably most of us have ever had to contend with. Today saving money is of key importance, I am particularly motivated in this direction, I even re-grind my own Morso blades when they get blunt and yes, I do hollow grind them and then hone them afterwards. Anywhere which you can save money, really matters these days as long as it does not cost more somewhere else.

I save a lot of money on mouldings, because I try to hand finish almost all the frames that I make and therefore mostly purchase only bare wood mouldings, I also have lots of other ways of re=using much of my waste and use it to make things to sell and increase my sales, without having to buy extra materials to do it. I even cut up bits of waste wood and mouldings to make slips, spacers and fillets. It's all about where money comes from and where non-profit making money is going. It may not be rocket science, but it can take a lot of time and effort to learn it all. It makes so much difference to understand how your business and you pricing systems is working behind the scenes, look at how the money is moving between coming in as sale income and going out as various expenses. Also about timing expenses and purchases. Sometimes timing is everything!
Mark Lacey

“Life is short. Art long. Opportunity is fleeting. Experience treacherous. Judgement difficult.”
― Geoffrey Chaucer
Justintime
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Re: Margins, Markups, Mixups?

Post by Justintime »

Justin George GCF(APF)
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Justintime
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Re: Margins, Markups, Mixups?

Post by Justintime »

Assuming that these cost prices include overheads and labour, that is a very healthy profit!
You don't say whether you are using a pricing software or not. If not I suggest looking at Frame R by Framiac (who also wrote the pricing a frame website.)
Justin George GCF(APF)
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iorek
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Re: Margins, Markups, Mixups?

Post by iorek »

Thanks very much for the input, really appreciate it. Coming from photography, my pricing was worked out very differently so I'm just trying to adjust to it. Loads for me to ponder there and I'm grateful for the time and thoughtfulness. Thank you.
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prospero
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Re: Margins, Markups, Mixups?

Post by prospero »

You should not put so much emphasis on marking up materials. You are not selling materials but a finished product.
A builder doesn't work on marking up the cost of the bricks when pricing a house. :P

Work out the *REAL cost of the materials and add on your hourly fixed overheads - rent/rates/electricity/phone/etc.
Work out your hourly labour costs. What this is depends on what income you would like. It's a job that demands skill
and knowledge. Don't undervalue yourself. Have you had a bill from a solicitor lately? :lol: Or a garage. :lol: :lol:



* By REAL, I mean what you consume in the course of making a frame. NOT what ends up in the frame.
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