But on average, if your food and labor costs remain no more than 30% of your sales, your restaurant should stay in the black. A business looks at the historical cost of goods as a percentage of its sales and uses that figure for the forecasted sales amount. Some consultants recommend shooting for a 15 to 30 percent sales-payroll percentage; others say as low as 9 percent. For now, we’ll continue this post along the 30% number, but know that this doesn’t have to be the final number you shoot for. To calculate the operating expense percentage, divide operating expenses by effective gross income. I recommend investing in a good website that you own, yes. If you’re in the “startup” phase, you’re likely spending money on things that aren’t going to immediately bring in any income. But you don’t necessarily need to pay for ConvertKit when you don’t have an existing email list. Mike suggests we flip the script. Divide labor cost by total operating costs For example, if labor costs $9,000 per month and total operating cost is $15,000 per month, divide $9,000 by $15,000 to get 0.6. Due to heavy demand by CPA and CFA candidates, Joseph the owner of the stationery shop purchased 150 pieces of normal calculators at the rate of 35 per piece and 80 pieces of financial calculators at the rate of 115 per piece. Just divide the expenses by the income number and multiply by 100! Performing these calculations is an important part of decision-making and long-range planning for any organization. I encourage you to crack down on your numbers a bit and see if you’ve been spending a bit too much. Any higher and you’re taking from one of these elements. See you next week. What is the Percentage-of-Sales Method? Calculate your total sales in dollar amounts for the period. You’ll want to target this number ASAP). For example, purchase discounts may be applied to purchases once a unit count passes, say, 10,000 per year. But what about a longer-term expense? First off, if this is your question, it’s a miracle you’re still reading this far. The percentage of sales method is a tool for forecasting and budgeting. Unfortunately, checking your bank balance is not enough to go off of to assess your business’ finances. Take your inventory value at the end of a quarter divide it by sales for the same period and multiply by 100. If you have to work down to 30%, that’s fine. We’ve got work to do! Overhead is not a percentage of costs or sales. Normally, CoGS is expressed as a ratio of a percentage of cost-to-sales. You may want to compare percentage of sales to different categories of expenses in addition to total expenses. He spent an amount of $2500 on transportation and other charges. Not bad, right? Many of us are going to be over that, when we take a look at our own Profit & Loss Statements. If you earn at least a consistent $2,500 a month, your 30% threshold is $750. You want to know the percentage of sales to sales expenses. When calculating expense to sales ratios, consider both variable and fixed expenses. Typically, we take our income, subtract our expenses, and call the leftover profit (if we’re lucky enough to have any). Factoring in typical tax liability, optimal profitability, and desired salaries, 30% is about what’s leftover. If you are focused on optimizing inventory, another useful measure of inventory or working capital is the ratio of inventory to sales or inventory as a percentage of sales. I’ve written more about this system over here, but for now, here’s the shorty short: Profit First is based on the idea that we need to allocate our income and prioritize our profit before paying any of our expenses. One approach is to calculate them as a percentage of gross sales, but there’s no one-size-fits-all rule for what that percentage should be. If the total net sales for the period is $100,000, the company establishes an allowance for doubtful accounts for $3,000 while simultaneously reporting $3,000 in bad debt expense. For example, suppose your revenue for a particular period equals $200,000 and your expenses for the same period equal $95,000. He labeled the normal calculators with $50 and financial calculators at $150. Sales costs as a percentage of sales are traditionally presented in terms of gross margin and net margin. The calculation used to obtain the ratio is: Operating Expenses = to Sales Cost of Goods Sold + Total Expenses - (Finance + Depreciation) x 100 Sales Reviewed by: Jayne Thompson, LL.B., LL.M. His system guarantees profit. For example, if the historical cost of goods sold as a percentage of sales has been 42%, then the … First website quarterly and annual expenses margin and net margin to keep labor costs at about 30 % is... 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