If you are a typical crafts professional, then you work on a margin/gross profit/contribution rate of about fifty per cent. The first point you need to appreciate is that this is the same spread your gallery owners get when they double your price (it’s called keystoning). Yes, folks, it really is a level-playing field: we all have overheads, we all pay taxes and we all have to eat.
Whoa, you say! But that’s a lot of money. If you gross $100,000 a year, then that’s $50,000 to play with. If you’ve got a million-dollar business, then you’re playing with serious money. You must be rich! NOT!
Out of this massive cash flow you must pay rent, buy office supplies, produce sales literature and advertise, go to market, procure insurance for a variety of risks, cover your telephone and utilities bills, and pay someone to answer the phone and lick stamps. Okay, so most of the calls are personal… at least you aren’t the one taking them. These are your operating expenses. All of us have them.
In addition, you have to use these funds to obtain capital replacements/improvements, pay down bank loans, pay all the taxing authorities, and cover your working capital needs. The real question is: is there anything left for you?
The answer is yes, or at least hopefully so. Typically your operating expenses are twenty-five per cent of the gross, leaving you with another twenty-five per cent to cover the needs described in that last paragraph. Whatever is left over is yours. Grossing $100,000 a year in a growing business doesn’t leave you much to play with, but you should consider that you are investing in your future. If you’re at the million-dollar level, you probably have a real tax problem: the good kind. At the same time you probably got to that volume by borrowing heavily to finance equipment purchases and working capital needs (accounts receivable and inventories), so that a disproportionate share of your profits are being used to service that debt. Not to worry, as I’m certain there is still a bit left over for you.