Here is the next way to increase profitability.
#8 – Ruth’s Rule #2
I developed Ruth’s Rules many years ago to calculate the revenues needed for any expense – whether a cost of goods sold expense or an overhead expense.
Over the next three weeks I will give you examples of how to use Ruth’s Rules.
I am starting with Ruth’s Rule #2:
Sales at Break Even = Overhead Expense
Gross Margin
Here’s how to use Ruth’s Rule #2:
Your social media and website expense is $1,000 a month. What is the break even revenue that has to be generated assuming your company gross margin is 55%?
Sales at break even = 1,000/55% = $1,818.18
Now that you know the break even revenues that have to be generated, look at your revenues that are generated from your social media and websites. Do they reach at least $1,818.18? If so, then you are fine. If not, then what can you do to get the revenues to this volume? If you can’t get them here, then either find someone who can help you do this or don’t do it.
Here’s another way to use Ruth’s Rule #2:
Your office manager, who has been doing a great job, wants a raise from $50,000 to $60,000 a year. What increase in revenues does the company need to have assuming the company gross margin is 35%?
The additional expense is $10,000 (for simplicity, don’t include payroll taxes and other benefits).
Sales at break-even = $10,000/35% = $28,571.43
To justify her raise, ask her how she will help the company increase revenues by $28,571.43.
Next week: Ruth’s Rules #3.
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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
