Harry owned a local coffee shop. His total investment (cost of goods) in a cup of coffee was about $2.50. Harry sold a cup of coffee for about $5.00. Pretty good profit, right?
Wrong!
Harry’s overhead was 60%!
Let me show you what that does to profitability!
| COGS | $2.50 |
| Sales Price | $5.00 |
| Net profit | $2.50 |
| Overhead percentage | 60% |
| Overhead cost | $3.00 |
| Net Income | (.50) |
60% of all of Harry’s gross income went to overhead. For every $5.00 cup of coffee he sold $3.00 went to overhead and $2.50 went to cost of goods sold.
$5.00 – 2.50 – 3.00 = (-0.50)
Yes he was losing fifty cents on every cup of coffee he sold!
In Harry’s case we were able to make a few adjustments. We reduced overhead by eliminating some unnecessary subscriptions, scheduling employees during peak times, and increased profit margins by ordering in larger quantities.
Know your overhead percentage:
- Increase profits
- Stop losing money