Looking in the company bank account can be a humbling experience. How can the balance be so low when sales were in the hundreds of thousands this month?
Understanding your costs are a vital part of your business. The costs that you don’t see are the ones that create confusion when looking at your bank account. Understand your true profits and develop a business plan around how to make a lot of extra digits in the account balance section of your monthly bank statement.
It’s easy to miscalculate how much profit each sale makes. Profit in this article is referred to as the amount of money you or your company can keep after a sale. We’ll use the most popular online auction site as an example of much money you can expect when everything goes right with a sale. These are the costs most people don’t calculate when they see a Paypal transaction, or an email from your merchant service letting you know money is in your account.
- Merchant service fee
- Insertion (listing) fee
- Final value fee
- Shipping materials
- Shipping cost
- Employee wages
- Rent & Utilities
If you have a product you are selling for 50% profit, and your Paypal fees are 2.9% + $0.30 transaction fee, now your profit is 47.1% plus whatever $0.30 is as a percentage. If your product is $100, then you have to subtract another .3%. So now your profit after merchant service is 46.8%. This is without your other costs subtracted for this sale.
Listing Fees are one of the biggest costs people do not calculate. As fees change with time, and the type of listing you do will affect the cost, we are going to use a fake estimate of $1.00. If you use ad stylings, or choose where your ad shows up, there are additional costs. If the fake value of $1.00 is accurate, then your profit percentage is now decreased to 45.8%
Final value fees change all the time. Ebay is known for having a big final value fees that really bite into profit. We are going to work on the low end of the fee range. In the past, Ebay didn’t calculate shipping in their fees, so to be fair with our estimate, we will use 8%. So now removing the final value fees, our profit percentage is now at 37.8%.
Boxes, tape, ink for label, paper for label, etc, all cost money. Sometimes boxes are free, other times they cost a lot. We’re going to put an estimate of $0.50 as an average for boxes. now our wonderful profit percentage is now 37.3%
Shipping rates change, so again we are going with an imaginary cost of $10. Some shipping costs are less, some are more. but now our wonderful profit goes to a shinning 27.3%.
Employees are a wonderful resource for getting more work done than is possible for one person. The not so wonderful thing is the hourly rate we have to pay them. They deserve everything they work for, and this expense should not be looked at with distaste, but calculating it into profits is not a luxury my friend. Let’s say you have 3 employees at $10/hr and you sell 50 packages a day at a $100 each. We’re not going to go into workman comp, Social Security, and every other cost associated with them. so let’s do an easy calculation of 3 employees times 8 hours equals 24 hours at $10 a piece. Now we divide $240 by $5000 to get a total of 4.8%. So we subtract this percentage from our profits. Now our total is 22.5%
Offices can be a necessary evil. Spouses are not usually overly understanding about employees with tape guns running through the house and making noise. Plus, it’s nice having a beautiful office to have customers come to. Let’s say rent, power, internet, office phones, cellphones, cleaning and the fifty other costs that are not to be listed cost $3000 a month. 50 sales a day at $100 each times 30 days equals $150,000. 2% now how much we need to subtracted from profit totally it at 20.5%
Here’s a break down of percentage and costs to be subtracted from profit. Again these are Fake numbers.
- 3.2% for Paypal
- 1% for Ebay insertion
- 8% for Ebay final value fee
- 0.5% for shipping materials
- 10% for shipping costs
- 4.8% for employee costs
- 2% for Office and utilities
With these fake numbers on sales and expenses, our total percentage to be deducted from profit is a whopping 29.5%. Now 50% profit really turns into 20.5%. This is definitely a high figure. The trick is to build a nice excel worksheet if you are not familiar with Libre Office Base, Microsoft Access, or have access to a programmer to build you a nice database application. Knowing the numbers can make a break a business, and non of us like to own broken businesses.