How to Figure an Expense & Profit Multiplier
Knowing what price to sell goods and services at is crucial in running a successful business. Set a standard markup across the business to avoid rushed calculations, enable accurate forecasting and to provide reliable quotes. Identify the level of markup from a wide variety of sources that include competitor analysis, industry standards and desired rates of return. Use the information from these sources to figure an appropriate expenses multiplier to make sufficient profit and remain competitive.
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Instructions
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Analyze the financial statements of competitor businesses and determine the expense multiplier of those businesses. Locate the page(s) in the financial statements that contain the income statement. At the top of the income statement is a summary of what is known as the operating section. The operating section includes sales, direct expenses and stocks movement, or cost of sales. Divide the sales amount by the total sum of the direct expenses to obtain the overall expense multiplier for that enterprise.
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Prepare a budget and set sales targets. Obtain the expense multiplier by adopting a top-down approach to budgeting. This means setting sales targets and deriving the necessary expenses required to make those sales. Set annual sales targets and then break these down by product/services and then by week/month. Simply divide sales by expenses to obtain the multiplier.
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Set a desired rate of return for the business as a whole. Decide upon a desired return rate for the capital employed within the business. Use this to set expense multipliers to obtain the target level of profitability. Use this rate of return to compute sales cost from expenses costs. The rate can also be used to compare opportunity costs such as comparing whether the capital employed in a business would produce a better return through being invested elsewhere, such as on deposit or invested in another business.
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Purchase industry and professional publications. Study these magazines to determine industry-wide benchmark levels of profitability. The articles will disclose profitability levels of other businesses and provide intelligent commentary upon those results. Use this information when figuring expense multipliers, particularly when calculating the market rate and to ensure that sales prices remain competitive.
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References
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