Should we aim for Factor 3 or Factor 4?
To illustrate this if a company’s annual gross profit is £2 million and their annual labour cost equates to £1 million then they have a productivity factor of 2. (2,000,000/1,000,000=2)
At Oldfield Advisory we recommend that you aim for a productivity factor of at least 3 (Factor 4 was pre GFC), and believe us, it works in any business. If we are to aspire to this respectable productivity factor and indeed achieve it then we must set our sales targets accordingly:
- Calculate your annual overhead wages cost for the year, remembering to include national insurance and pension costs. Direct labour costs such as manufacturing labour and delivery drivers are not to be included as these are direct costs and therefore “above the GP line”.
- Add commercial salaries for full time equivalent working directors or owners. A suggested benchmark director’s salary is £80,000 per annum.
- Multiply the total of 1 and 2 by 3 (factor 3)
- Divide the result by the realistic and accurate gross profit margin percentage for your business. Remember to allow for direct costs, direct labour, delivery and carriage costs in your gross profit calculations.
- The resulting answer represents your “must hit” sales target.
- Overhead wages = £600,000 per annum
- Commercial salaries for directors – 5 full time working directors at £80,000 = £400,000
- Total = £1,000,000. Multiplied by 3 = £3,000,000 (Gross Profit Target)
- £3,000,000 divided by 30% Gross Profit Margin = £10 million Sales Target
We give assurance that if you follow this formula and if your other overhead expenses are not out of proportion you will make a healthy profit! Your company will be profitable and a great place to work!
For further advice on which costs to include above or below the GP line and other overheads benchmarks please contact one of our trained business and growth consultants for advice.