GENERAL REVENUE AND EXPENSE CATEGORY GUIDELINES
Our Party stores offer value, variety, access to hot new merchandise to their customers at discounted prices.
Profitability, of course, depends on many variables. The location, the cost and variety of merchandise, and the management skill of the owner are just a few of the many factors that will ultimately determine the level of profit.
Many expenses in this business are fixed; they stay constant regardless of the sales generated. The following table lists typical FIXED cost categories and it provides a model to use in determining what your costs will be.
Therefore, a few key VARIABLE cost categories will determine how well the store performs. They include:
MERCHANDISE - Store-owners will control their average cost of merchandise based on the suppliers they purchase from and the product mix they decide to put in the store. Your average cost of goods is usually 38%-48% of your sales. Computing and managing your average cost of goods is critical in managing this expense and providing your customers a wonderful selection of goods.
WAGES - Each client should strive to keep labor cost, including that of the owner and manager, in the range of 10 to not more than 13 percent of sales
FREIGHT - This is usually discussed in terms of freight cost as a percentage of merchandise purchased. The store owner should try to keep the range of freight cost to merchandise purchased between 3 and 5 percent. This can be managed by creating orders to meet the minimum for prepaid freight. Many of our preferred vendors provide manageable minimums to achieve this. By ordering minimum amounts to achieve free freight allows you to control this.
SALES - Sales level is the other key factor that will help determine your profit level. Sales per square foot will vary from location to location and from store owner to store-owner based on a myriad of factors. The size of the community, general customer traffic of the shopping center, store location, proximity to the anchor, previous business ownership, management and merchandising experience of the owner, and personal daily involvement of the store owner are just a few examples of the variables that will determine your level of sales. The business skill and experience of each owner, along with the level of involvement in and commitment to their store will have an impact on their success.
SAMPLE OF FIXED COST CATEGORIES
DESCRIPTION - RECOMMENDATIONS ON HOW TO DETERMINE COST
HEALTH INSURANCE - typically, this is a major medical policy for the store manager. You can offer no coverage, major medical coverage, or different levels of more complete coverage. It is recommended that this cost be kept at around $100 per month.
INSURANCE - this category relates to general business coverage and includes public liability, fixed articles, theft, and other coverage. Contact a local insurance agent for quotes.
ELECTRIC - the local power company can give you estimates of electric cost for retail establishments by square foot.
TELEPHONE - determine usage — again, your local phone company will give you insight into this nominal cost.
PERSONNEL - this typically includes items such as pizzas once a month and a year end party. Determine what you would like to do for your employees.
RENT - this figure includes the monthly stated rent and charge for common area costs. The lease agreement will state these charges. For preliminary planning purposes, contact with local realtors will give you a good idea of the cost range.
SUPPLIES - this category pertains to office and store supplies. Pens, tape, paper, printer cartridges, and like items.
ADVERTISING - routine advertising is always recommended to keep your store in front of the public. The local newspaper will provide various rates and programs.
DEPRECIATION - pertains to the periodic write-off of capital cost items. Your local accountant can provide further information.
OTHER EXPENSES - this is a catch-all for other costs that pertain to your business operation.
THIS EXAMPLE OF KEY FIXED COST CATEGORIES IS NOT INTENDED TO BE COMPLETE AND SHOULD BE USED FOR GENERAL INFORMATION PURPOSES. IT IS ALWAYS PRUDENT TO DO YOUR HOMEWORK AND DEVELOP A RANGE OF COST LEVELS THAT CAN BE USED FOR FINANCIAL PLANNING PURPOSES. AT THE END OF THIS SECTION YOU WILL FIND A BLANK WORKSHEET TO USE TO CREATE YOUR OWN ESTIMATES.
THE FOLLOWING ILLUSTRATION SHOWS THE FORMULA FOR HOW YOU CAN DETERMINE THE SALES NEEDED TO BREAKEVEN AND TO GENERATE VARIOUS LEVELS OF PROFIT FOR YOUR STORE: ILLUSTRATION FOR A SMALL STORESUMMARY OF VARIABLE COST RANGES AS A PERCENTAGE OF SALES
| VARIABLE COSTS | RANGE AS A % OF SALES | USED FOR ILLUSTRATION PURPOSES ONLY |
| MERCHANDISE | 38% – 48% | 43% |
| WAGES | 6%-10% | 8% |
| PAYROLL TAX | 1%-1.6% | 1.30% |
| WORKERS COMPENSATION | .25%-.50% | 0.40% |
| FREIGHT | 3%-5% | 4% |
| TOTAL | 48.25%- 65.1% | 56.70% |
SUMMARY OF ANNUAL FIXED COSTS
| ESTIMATED
ANNUAL FIXED COSTS |
RANGE AS A COST PER 1000 SQ. FT. | COST ESTIMATE – USED FOR ILLUSTRATION PURPOSES ONLY |
| MANAGER SALARY | $20,000 | $20,000 |
| HEALTH | $100, ANY SIZE | $1,200 |
| INSURANCE | $1,200-$1,600 | $1,400 |
| ELECTRIC | $1,300-$1,600 | $1,450 |
| TELEPHONE | $500-$1,000 | $800 |
| PERSONNEL | $700-$1,300 | $1,000 |
| RENT*** | $11,000-$19,000 | $15,000 |
| SUPPLIES | $600-1,000 | $800 |
| ADVERTISING**** | $1,000-$1,800 | $1,400 |
| DEPRECIATION | $3,000-$5,800 | $4,400 |
| OTHER EXPENSES | $100-$1,000 | $700 |
| TOTAL EST. FIXED | $48,150 |
NEXT, WE PUT THE ESTIMATED ANNUAL FIGURES INTO THE FOLLOWING EQUATION TO DETERMINE THE TOTAL SALES NEEDED TO BREAKEVEN. TAXES NOT INCLUDED FOR THIS ILLUSTRATION.
SALES = VARIABLE COSTS + FIXED COSTS + PROFIT
SALES = 56.70% + $44,550 + 0 (NOTE: PROFIT = 0 AT BREAKEVEN)
100% SALES = 56.70% + $44,550
29.3% SALES = $44,550 (NOTE: 100.0 – 56.70 = 43.30)
SALES = $102,887 (NOTE: 44,550 / 0.433 = 102,887)
TO PROVE THE FORMULA, WE PLUG THE NUMBERS INTO THE FORMULA
SALES = VARIABLE COSTS + FIXED COSTS + PROFIT
$102,887 = $58,337 + $44,550 + 0
SO, WE SEE THE FORMULA WORKS – IF YOU GENERATE $102,887 IN SALES, VARIABLE COSTS WILL BE $58,337 ($102,887 * 0.567) AND THE FIXED COSTS WERE DETERMINED TO BE $44,550.
THUS, IF YOUR COST STRUCTURE IS THE SAME AS IN THE ILLUSTRATION, ONE WOULD NEED TO GENERATE $102,887 IN SALES TO EXACTLY BREAKEVEN ON THE BUSINESS.
BREAKEVEN MEANS TO NEITHER MAKE NOR LOSE MONEY.
HOW MUCH IN SALES REVENUE WOULD ONE NEED TO GENERATE EACH DAY TO BREAKEVEN IN A BUSINESS?
ASSUMING 360 WORK DAYS, $102,887 / 360 = $285.80
SO, IF ONE AVERAGED $285.80 IN SALES PER DAY FOR THE YEAR, THEY WOULD EXACTLY BREAKEVEN ON A BUSINESS
HOW MUCH IN SALES REVENUE WOULD ONE NEED TO GENERATE EACH HOUR TO BREAKEVEN IN A BUSINESS?
GOING ONE STEP FURTHER, ASSUME THAT STORE IS OPEN 10 HOURS PER DAY. A STORE WOULD NEED TO GENERATE $28.58 (285.80 / 10 = 28.58) IN SALES PER HOUR, ON THE AVERAGE, FOR EACH DAY OF THE YEAR.
HOW MANY CUSTOMERS PER HOUR DO I NEED TO BREAKEVEN?
IF THE AVERAGE CUSTOMER SPENDS $18.00 PER PURCHASE, YOU WOULD NEED TO 1.59 CUSTOMERS PER HOUR (28.58 / 18 = 1.59) TO ACHIEVE BREAKEVEN ON THE BUSINESS.
THANK YOU FOR STAYING WITH THIS LENGTHY ILLUSTRATION. NOW WE CAN USE OUR FORMULA TO DETERMINE DIFFERENT LEVELS OF POTENTIAL PROFIT.
WHAT IF I WANT TO MAKE A 10% PROFIT – HOW MUCH SALES REVENUE WOULD I NEED?
COMPLETE THE STANDARD FORMULA
SALES = VARIABLE COST + FIXED COST = PROFIT
100% SALES = 56.70% + $44,550 + 10% (PROFIT) SOLVING 100% SALES = 66.70% + $44,550 (56.70% + 10% = 66.7%)
33.3% SALES = $44,550 (100.0 – 66.70 = 33.3%)
SALES = $133,784 NOTE ($44,550 / 0.333 = $133,784)
SALES PER DAY = $371.62
SALES PER HOUR = $37.16
CUSTOMERS PER HOUR = 2.06 (ASSUMES AVERAGE PURCHASE OF $18.00)
WE COMPUTED THE SALES NECESSARY TO MAKE VARIOUS LEVELS OF PROFIT FOR A 1,000 SQUARE FOOT STORE – SEE FOLLOWING TABLE:
ASSUMPTIONS:
- OPEN 360 DAYS A YEAR, 10 HOURS PER DAY, AVERAGE PURCHASE OF $18
- VARIABLE AND FIXED COST DATA FROM EXAMPLE ABOVE
- THE RESULTS FOR AN ACTUAL LOCATION WILL VARY
| IF YOU DESIRE (PROFIT) |
ANNUAL SALES RQD | AVG. DAILY SALES RQD | HOURLY SALES RQD | CUSTOMERS PER HOUR RQD | PROFIT BEFORE TAXES |
| BREAK EVEN | $111,201 | $308.89 | $30.89 | 1.72 | $ 0 |
| 5% | $125,718 | $349.22 | $34.92 | 1.94 | $6,286 |
| 10% | $144,595 | $401.65 | $40.17 | 2.23 | $14,459 |
| 15% | $170,141 | $472.61 | $47.26 | 2.63 | $25,521 |
| 20% | $206,652 | $574.03 | $57.40 | 3.19 | $41,330 |
| 25% | $263,115 | $730.87 | $73.09 | 4.06 | $65,779 |
| 30% | $362,030 | $1,005.64 | $100.56 | 5.59 | $108,609 |
THE VARIABLE COST AND FIXED COST RANGE INFORMATION, ALONG WITH THE COSTS USED IN THE ILLUSTRATION ARE NOT TO BE USED BY YOU TO DETERMINE YOUR COST LEVELS. ALSO, THE PROFIT, ANNUAL SALES, SALES PER DAY, SALES PER HOUR, AND PROFIT ARE SIMPLY A BY-PRODUCT OF THE VARIABLE AND FIXED COST DATA SUPPLIED FOR ILLUSTRATION PURPOSES AND SHOULD NOT BE USED BY YOU TO DETERMINE YOUR FINANCIAL PERFORMANCE, INCLUDING PROFIT LEVELS. THIS ILLUSTRATION SIMPLY ALLOWS YOU TO FOLLOW THE MATHEMATICAL CALCULATIONS IN DETERMINING YOUR FIGURES.
THERE IS A TREMENDOUS AMOUNT OF INFORMATION LOCATED ON THE INTERNET THAT COULD BE USEFUL IN DETERMINING THE COST STRUCTURE OF YOUR STORE.
***BECAUSE RENT VARIES FROM REGION TO REGION, PLEASE TALK TO YOUR SALES REPRESENTATIVE FOR ADDITIONAL INFORMATION.
****THE AMOUNT YOU SPEND ON ADVERTISING IS COMPLETELY UP TO YOUR DISCRETION.
CLICK HERE TO GET THE FINANCIAL WORKSHEET
(requires Microsoft Excel).
NOTE: The financial performance of each and every store is dependent upon many variables including location, population, average income of customers, merchandising habits, management experience, etc.
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