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Managing a Business/A Question For David Stephensen

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QUESTION: Hello,

Thank you very much for taking the time to answer my question. It is much appreciated!

I have recently taken over a florist (a small shop). I am looking to improve the amount of profit that the business makes, which currently is very little.

As far as I know, a florist works like this: A florist takes an order, X percent is deducted straight away from the order total to account for labour costs, fixed costs and profit. Then, flowers plus other materials (at retail price) are used to make the product. To illustrate: for an order of £40, a percentage, let’s randomly pick 20%, is deducted straight away, leaving £32 for the flowers etc.

My question to you is this: what should the “X percent” (see above) be?

N.B. I am aware that there probably are better formulas than the one I use and have described above; however, I urge to answer my question directly, rather than suggest a completely different formula.

Thank you,

Peter Hughes

ANSWER: Hi Peter

A short start point answer is, if you use the COST price of materials and flowers instead of the retail price, 50%, but you will need to see if this is sustainable.  See below.

Here is a long answer, in case you are interested.

It is a challenge to give you a figure for this formula, because I don't have all of the information. How much markup have you already put on the 'raw material' flowers?  How much labour are you putting into arranging the flowers before delivery? Are they arrangements or just bunches? Do you have strong competitors nearby?

May I share with you a more conventional way of working?

The first three steps to increasing your profits are measure, measure and measure.  It is very important to establish your actual costs.  Best to use a spreadsheet—get help from a friend if you are not sure about using them.

How much time does it take to do each type of arrangement?  What is the actual cost to you of an arrangement? A bunch?  

Note that in calculating the costs of arrangement you should treat yourself as an employee—include your labour in your costs at an hourly rate that you might pay a suitable employee.

I am not hugely experienced in retail, but it seems to me that retailers generally put about 100% markup on the cost of their goods (supermarkets probably a bit less), so let's work on that for a start.

From this markup you pay your fixed expenses such as rent, insurance, advertising, cleaning and the labour (including yours—this is how you show the difference between owning a job and owning a business) of attending to customers.  The rest is the profit from the risk you are taking by being in this business (if you are making a profit then you are owning a business as well as a job).

From this you can now calculate what volume of sales you need just to pay these fixed expenses, before your business starts making a profit.

Now when you calculate all of this, compare what you calculated that you should be charging with the prices your competitors are charging or your predecessor in the business was charging (some reconnaissance needed).

If your competitors' prices are about the same as or higher than your calculated retail price, then everything is fine and you have your answer. If they are much lower, then you may need to lower your markup percentage. A smaller markup means you have to sell more flowers and here is where efficiency, marketing, earning customer loyalty, salesmanship, business development and all of those other things come in.

So here I have given you a rather a large serving of information and suggestions to digest. Best of luck with your business.  Do keep educating yourself about business and may you soon own a chain of florist shops!




---------- FOLLOW-UP ----------

QUESTION: Hello Mr Stephensen,

Thank you very much for your very quick and informative reply. It is very much appreciated!!

You are absolutely right to say that you can’t give me an exact figure for my formula because I haven’t supplied you with other vital bits of information. My apologies for that. I should’ve realised that you wouldn’t be able to give me a figure without other vital bits of information. Let me address that now and provide you with the information that you mentioned you would need:
- I was until recently doubling my wholesale price to get my retail price, but now I treble my wholesale price to get my retail price (this applies to flowers and all other materials used).
- The labour cost for orders, is approximately 10%. So for example, for a £50 order, £5 (10%) will be spent on labour in making the product.
- Yes, most of the time I sell arrangements. When I do sell just bunches or plants, they are sold at my retail price (which is three times wholesale price), and that’s how I make money from selling those products.
- I do have quite a bit of competition nearby, yes. (I have researched the prices that local florists charge and my prices are very similar.)

Now that I’ve supplied the above information, I’m hoping you’ll be able to give me a rough figure for my formula. If you need more information, please tell me and I will provide it.

Thank you,

Peter Hughes

ANSWER: Hi again, Peter

I am trying to understand why this formula is as it is, as there seem to be costs mysteriously divided on each side of it.  Is the purpose of this formula perhaps to determine how much worth of flowers and materials you will use to make up the order?  This interpretation I can make sense of, so I'll go on that basis until you correct me.  

Let's assume for simplicity that the order is all arrangements. If your 10% labour is a cost, then you need to add a profit to this labour cost.  Let's say that the resale price of labour is also three times the cost (in my experience this seems to be the case).  This markup of labour, flowers and material is the gross profit from which you take your fixed expenses, leaving your net profit.

If you are in fact tripling the labour cost, then surely your X would be 30%. For a $100 order you say the labour cost is $10 and so what you need to charge the customer is $30 for the labour.  This leaves $70 worth of flowers that you can use.

If there are fixed costs that relate specifically to the order, such as a delivery fee,  than you would have to factor that in to the percentage somehow.

Am I close to understanding your question?


---------- FOLLOW-UP ----------

QUESTION: Hello again Mr Stephensen,

Thank you again for another very quick and detailed reply. It is very much appreciated!!

First of all - my apologies. I forgot to tell you the reason why I use the formula that I do. It is indeed for the reason that you mention.

Given what you’ve said, am I right to assume that in your opinion the “X percent” should to be 30%?

Also, when you say that: “This leaves $70 worth of flowers that you can use.” - would this $70 worth of flowers be made up from wholesale price flowers or retail price flowers (don’t forget to bear in mind that my retail prices = three times wholesale prices)?

(And as for your final point - I charge a fee for deliveries, so I don’t have to worry about delivery costs in the formula.)

Thank you,

Peter Hughes

Answer
Hi Peter

I am sorry for the delay in answering this. I did not get an email notification and only came back today to remind you to give me a rating!

Thanks for confirming my theory about the reason for the formula.  My answer is based purely on what you have told me and the following two assumptions:

1. All of your fixed costs come out of your gross profit, so these are not part of the percentage calculation.

2. Your markup on labour related to a specific order is the same as on the flowers: 200% (triple)

It seems that this percentage represents the retail price of the labour.  If the cost price of the labour is 10% of the quoted price than the price you are charging for labour would be 30% of the quoted price.

And, yes, according to your original question the $70 would be the retail price of the flowers and materials. For example, consider an order of $100 (working in round figures). Your estimated labour cost would be $10. You sell this labour to the customer for $30.  This leaves $70 worth of flowers and materials. These cost you $23. This gives you a gross profit of $66. From this and the gross profit from all of your other sales you pay your rent, power, labour for over the counter sales, insurance, and so on. What is left is your net profit.

Does all this fit with the question you set out to answer?   

Cheers

David

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David Stephensen

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I can answer questions about all aspects of designing and producing procedures manuals for small and medium sized businesses, including managing the documentation project, the analysis that leads to the design of the manual, business writing, publishing the business manual, educating the staff about continuous improvement and using ISO 9001. You can find out more at my website http://www.qdt.com.au and sign up to receive my blog.

UNIVERSITY STUDENTS FROM INDIA AND PAKISTAN (and everywhere else, too) PLEASE NOTE: I do not have time to complete your assignments for you. Please do not paste questions from your assignments into a request for my help. If you ask me a specific question in your own words and fool me into thinking you are a business person by your interest in and commitment to the subject then I will answer you.

Experience

I have been a professional technical communicator and information designer since 1992 and have worked in business process analysis since 1998. I have produced procedures manuals for businesses and software user manuals that reflect business processes. I also provide internal quality auditing services. I have created a template for small and medium business operations manuals.

Education/Credentials
B.Sc. (University of Queensland), B.Ed. (Tasmania University)

Awards and Honors
Excellence Award in the Society for Technical Communication Australia Chapter On-line Communications Competition, 2009, for Keech Australia's procedure manual 'The Way We Do Things'

Merit Award in the Society for Technical Communication Australia Chapter On-line Communications Competition, 2006, for the CPA Australia Event Scheduling Application User Manual

Merit Award in the Society for Technical Communication Australia Chapter On-line Communications Competition, 2005 for the Lensworth Customer Relationship Management User Manual

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