Increasing Sales
Fixed Expenses
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Magic Trick / Accounting 101

Tentative Goal

I would like to increase my company’s net profit by $10,000/mo.

Let’s set your tentative goal as a desire to increase your company’s profit by $10,000/mo. We assume monthly sales of $100,000/mo, thus achieving your goal would be a 10% increase to $110,000/mo.
Below we begin a discussion of the elements involved in achieving the tentative goal we have set for you. If you do not understand the terms or if accounting is not your forte, we provide a brief introduction to accounting in a separate discussion below. We start with a Magic Trick Warren has used in his accounting classes, Then provide a brief 101 Accounting course for you.

       Your profit is determined by the interaction of quantity, price, variable costs and fixed costs within your business. If you have 500 customers who buy an average of 10 items this month, your monthly quantity is 5,000 items. When your average price is $20, your monthly sales volume will be $100,000.
       If each item you sell this month costs you an average of $14.95 to buy or make, your monthly variable costs are $74,750. This gives you a gross profit of $25,250. Your gross profit margin would be 25.25%.
       Perhaps you have fixed costs this month for rent, wages, insurance, etc. of $15,250. This gives you a net profit of $10,000 for the month. Your net profit margin would be 10%.
      By making small changes in each of these four elements of perhaps 5%, you can create a substantial increase in your net profit. For the example below we project a 5% increase in both quantity and price, thus a factor increase of 1.05. We project a 5% decrease in both variable costs and fixed costs, thus a factor decrease of .95.

        Net Profit increased by $11,199.38, so you exceeded your goal of $10,000/mo. Net profit margin increased by 9.23%, even though you changed each of the four elements by only 5%.
You may understand the terms and example above and be ready to take steps to enhance your bottom line. OR the above example may be confusing. Either way Chimorel and its affiliate coaches can support you.
       If the example on the right is confusing, we explain the terms briefly in the discussion below. if you understand, skip the explanation and begin to enhance your bottom-line with Elements Of Increasing Sales.
        When you first start a business, your primary focus must be on getting and keeping customers. As you grow, you can never lose your customer focus, but you must broaden your focus to deal with many other areas. Elsewhere we will deal with a variety of marketing strategies. Now let’s to examine the Elements of Increasing Sales.

Explaining Terms In The Example

        The example is based on understanding basic accounting principles and terms. The Example is essentially a look at elements on an income statement. In an income statement you start by determining sales. Then you subtract variable costs to determine gross profit and then subtract fixed costs to determine net profit.
  An Income Statement is an accounting report a business prepares to determine how much it is making during some period of time, like a month, a quarter or a year. Our example was based on income for one month. It compared what could happen if small changes were made in four elements in a future month. The four elements were quantity, price, variable costs and fixed costs.
        Sales consist of the number of items you sell (quantity) times the price you sell each item for. If you sell two shirts for $19 each, your total sale is $38. Over a one month time frame you may make many sales, each consisting of a quantity of items times a sales price for each item. If 500 customers buy an average of ten items each, then you sell a quantity of 5000 items this month. If you only sell one product you will have one price. If you sell many products, you can use an average price to quickly estimate your monthly sales.
        Your variable costs consist of all those costs involved in directly acquiring and selling the items you sell. It involves buying items, making items and selling items. If you make items you may have costs for labor, materials, equipment, utilities which do vary with sales and other things. If you buy items, you may have costs for inventory, shipping, sales commissions, and other things. In all cases, the variable costs go up and down based on the number of items you sell. In the long run (over many years) all costs tend to be variable as you make decisions to build/acquire new facilities and change various parts of your business. On a month to month basis, however, only those costs that vary directly with your sales volume are variable costs.
         Your fixed costs consist of all those costs which do not change directly based on the sales you make. They may consist of your administrative staff, rent, insurance, office equipment, utilities which do not vary with sales, and much more. In the short run many things are fixed. Once you make a decision to spend money, it tends to be fixed for a short period of time until you make a new decision.
       Gross profit is determined by subtracting variable costs from sales. Gross profit margin is a percent of sales, determined by dividing gross profit by sales. Net profit is determined by subtracting fixed costs from gross profit. Net profit margin is a percent of sales, determined by dividing net profit by sales.
       If the above discussion is still a little fuzzy, you may want to learn a little more about accounting with our Accounting 101 course. Its free. Click the link above.

Elements of Increasing Sales >>

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The elements to increase sales include: Retaining Existing Customers, Attracting New Customers, Sales Frequency, and Average Sale. Once again small changes in each element can have a significant impact. With small increases, we achieved a 23+% increases. For the original example, we projected a 5% increase. What would happen to our original example if we factored in a 23+% increase?
How to increase sales is outside the current discussion. Explore the Sales & Marketing area to learn how to accomplish this objective.

<< Example With 23+% Sales Increase

       Recognize this 23+% increase in sales, results from an 18% increase in quantity. Other changes were held steady. You may have noticed that an 18% increase in the number of customers resulted in a 23% increase in sales because it included the price increase (5+18=23). Let’s see $15,000 additional net profit is 150% more than the original goal of $10,000 increase.
        If you are skimming quickly through and are getting a little confused, it is not important. The point is that by making small changes you can have significant improvement in your bottom line. If you want to understand the discussion, slow down, read carefully and think about what you are reading.
        To recap: The 18% is shown by the 1.18 number to the left of 5,885. The 23+% is shown by 23.59% to the right of $123,585. We gave you an original goal of $10,000. $15,515.79 is more than 150% of this original $10,000 goal.

Focus on Value not Price

Sometimes a manager tries to increase sales by reducing price. Let us suggest that if you are going to compete solely on the basis of price, it is a losing strategy. You must drastically reduce your costs in order to effectively reduce your price. Most of the time this results in a reduction in service to your customer. Reduction in service is much more likely to reduce sales. So now you are not only reducing your prices, but you are also reducing your sales volume.
The table below gives you a strong indication as to why price reduction is usually a losing strategy. If you reduce your price by the % at the left and your present gross margin is the % at the top, you must increase your sales volume by the % in the table to produce the exact same profit. To increase profitability, you would have to increase sales volume more than the % shown in the table.

Now, think about what the table above is telling you. If you reduce your price by 18% and your gross margin is 20%, you must sell 9 times as much as you are currently selling to make the same amount of money as you are currently making. That is not two times as much or three times as much, but nine times as much.
Your focus should be on customer service and reasonable prices. Walmart’s advertised “always low prices” is actually based on a corporate philosophy of buying on average at 5% lower than the competition and selling at an average price of a small % above the competition with heavily discounted prices on specific items. Be very selective on how you use a low price strategy. Create the perception of value and combine good value with superb service.

The Customer Really Wants the Best Value

Sometimes you have to teach them.

       Yes, some customers are always looking for the lowest price. Most customers look for the best price. The best price is the price which gets the job done at a good value. If you want to always sell at the lowest price, chances are you will have to cut corners somewhere. Then instead of doing it right the first time, you will have to do it over to provide good service. Doing things twice costs more than doing things once. If customer service slips, you are likely to lose customers and a potentially irreversible trend begins until you are out of business.
      It is to your advantage to enable the customer to understand that they “pay for what they get” not “get what they pay for.” If a customer is stuck on price, let your competition have the customer. Sooner or later the competition will go out of business and the customer will have to raise their standards to get what they actually need. This is a character building exercise on your part. It takes some courage to let a customer go, knowing you can’t “afford to cheapen” your value to meet what they think they want.
        Price is important when everything else is equal. If you provide superior service and genuinely enable the customer to meet their needs when your competition focuses only on price, you will always win long term. Your job is to provide incredible value at a price that keeps you in business and growing, then to educate your customers so they know the value they are receiving.

In large part productivity comes down to getting more sales per dollar of fixed costs. We provide our top ten ideas for reducing fixed costs under Expense Control.

        Ask yourself this question, “If I spend more on this fixed cost will it help me make more money than I spend?” If not, the cost is a candidate for reduction. You may have to pay the money for rent, insurance, etc. Perhaps spending more money to have a prestige address will generate more sales. If not, would a less expensive address meet your needs without affecting sales?
        Wages may be a big part of your costs and can be an easy target when times are tough. Whenever possible, however, we suggest you train your team to provide superior service and generate more sales, rather than reducing staff. We address this more under Riches vs Wealth, where we discuss developing “proprietors” rather than employees.
       The proprietor focus is designed to enable people to grow by expecting them to become responsible and giving them opportunities to achieve their destiny within your business. Companies that give their associates opportunities to feel real ownership typically face fewer tough times and can get greater support from their “associate partners” when times are tough.

As you begin to focus on fixed costs, keep your eye on customer service and increasing sales. As long as your customers are happy and sales are increasing, cutting costs is a great idea. When customers complain and sales are dropping pay attention to what costs you are cutting.
If you would like support beyond the ideas above and our top ten cost cutters, you may want to explore our coaching services.

Let’s Make It Happen !!! We conclude this section by encouraging you to take steps to increase net profit by $10,000/mo or whatever goal is realistic for you.
When you click Strengthen My Business below, you will enter the section of our website designed to enable you to strengthen your business. We look forward to helping you build your business and developing resources to support others, including your employees.
When you click Explore Riches Wealth & More above you will enter the section of our website designed to challenge you to develop employees who take a proprietary interest in making your business grow.

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A Little Bit About Accounting

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Debits (left) & Credits (right)

As he takes off his coat Warren says, “See, there is nothing up my sleeve, but watch closely I’m about to perform a Magic Trick. Watch carefully as letters disappear before your very eyes.” Warren then writes on the board the word: cRedit
Warren erases everything except the R and says “R stands for right. Credits always go on the right. Now watch carefully as we make more letters disappear.”

Then he writes on the board the word: dEbit Again Warren erases everything except the E and says “Now credit has more letters than debit. In accounting everything must balance.”
He then erases a little more to form an L and says “L stands for left. Debits always go on the left. There is much more to this magic trick, but remember that Debits and Credits in accounting must always balance. Are you ready to learn more?

More of the Magic Trick

Balance Sheet and Income Statement

In accounting there are a balance sheet and an income statement. The balance sheet keeps track of things like A ssets, L iabilities and ownership OE. It reports these things as of a moment in time, like the end of the month. The formula for the balance sheet is: A = L + OE
Assets are things like buildings, cash, equipment, accounts receivable, inventory and many other things, tangible and intangible. Assets can be short term or long term.
Liabilities are things like debt, accounts payable, mortgages and more. Liabilities can also be short term or long term.
Owner’s Equity is that part of your assets that are paid for and that you own.

The income statement keeps track of things like I ncome, R evenue and E xpenses. It reports these things over a period of time, like a month, a quarter or a year. The formula for the income statement is: see image
So if Income = Revenue – Expenses, it is also true that Income + Expenses = Revenue. To keep everything positive we will use the I+E=R formula. Income is the amount of revenue left over after you take out your expenses.
Revenue consists of sales and other things that put money in the business as a result of something you do, like sell stock or sell a building, beyond just making sales. Expenses take money out of your business.
Expenses may vary on the basis of sales, may be fixed costs or may be other costs incurred that are not a normal part of doing business.
Now let’s turn our formulas into ways to keep track of debits and credits.

More Magic: the Magic Box

The balance sheet and income statement tell much of the story about a business and essentially track every account that will be in your chart of accounts when you start your business. Each account has a debit side and a credit side. Each account can have transactions which increase the account and which decrease the account. The last part of our Magic Trick is to develop a box which will make it easy for you to know when to Debit and when to Credit a particular account when it increases or decreases.
Look carefully at the box on the right. It contains all the elements of the formulas. On the left are Assets, Income and Expenses.

On the right are Liabilities, Owners Equity and Revenue. Once you know what an Asset is or what any other element is and you remember whether it goes in the left or right box, you can know what to do with any transaction that affects any account. Below we add Debits and Credits and increases or decreases to each account in the box.

On the right we add Debits and Credits and increases or decreases to each account in the box. Remember Debits (DR) always go on the left and Credits (CR) always go on the right. This is the positive or increasing side of any transaction. When we get to “T” accounts in Accounting 101 you will recognize DR=L and CR=R.
When you increase anything in the left cell (Asset, Income, Expense) you debit it. When you increase anything in the right cell (Liability, Owners Equity, Revenue) you credit it.
Don’t get confused at this point. When we look at the negative or decreasing side of Debits and Credits, the cell shows -CR on the left and -DR on the right. When you enter your transactions into a journal or “T” account, Debits will still be on the left and Credits will still be on the right, but you will enter a negative number. To keep the formulas in the Magic Box straight the cell shows them with – signs. When you decrease anything in the left cell (A,I,E) you credit it. When you decrease anything in the right cell(L,OE,R) you debit it.

Memorize this Magic Box or keep it handy when you post. Learn what an asset is, what a liability is, what owner’s equity is, what income is, what an expense is and what revenue is. When you set up your chart of accounts you will know what every account is. Once you understand what each account is and you follow the Magic Box above, you need never again spend hours trying to figure out why your books won’t balance. Just balance each transaction correctly as you go and your books will balance when you are done. Better yet set up a computerized accounting system, like Quick Books, and make your life less complicated.

Learn a Little Bit About Accounting

This free online accounting course will cover the basics in beginning accounting. It does not replace a more comprehensive college level course, but Warren has taught eight levels of accounting at two different colleges and a tax course at a third college. The principles that follow come from the first level accounting course. We start by learning just a little bit using three simple transactions for Jonas Furnisher that follow our small changes for the Tentative Goal. Then we jump into a more complete discussion of Accounting 101.

Chart of Accounts

One of the first things you want to do when you start a business is to set up your chart of accounts. Then you will analyze and post transactions, pull a trial balance and create a balance sheet and income statement. For now we will keep things simple. To really learn accounting you will need to learn how to handle the complicated transactions.
A simple Chart of Accounts might be 100 Cash, 102 Inventory, 103 Accounts Receivable, 200 Accounts Payable, 300 Owner’s Equity, 400 Sales, 500 Cost of Goods Sold, 501 Selling Expenses, 502 Other Expenses, 600 Closing Account.
Notice that each account name is associated with an account number. An account number is not required, but for those of us who are old school, it makes life easier.
For our example Assets start with 100, Liabilities start with 200, Owner’s Equity starts with 300, Revenue starts with 400, Expenses start with 500, and the closing account starts with 600. We will discuss each of these accounts more as transactions are entered, but this is how you know which account is what.

100 Cash is an asset = A
102 Inventory is an asset = A
103 Accounts Receivable is an asset = A
200 Accounts Payable is a liability = L
300 Owners Equity is equity = OE
500 Cost of Goods Sold is an expense = E
501 Selling Expense is an expense = E
600 Closing Account closes all transactions

Analyzing & Posting Transactions

We will look Briefly at three transactions. If you continue on to the full Accounting 101 course pdf, we will explore twelve transactions. A real business would have potential thousands of transactions and be much more complicated. The intention here is to give you a beginning understanding of how to analyze and post transactions and then do a few other steps in the accounting process. For each Tr look at the Magic Box to analyze. Numbers are posted in thousands, thus $100,000 equals 100 as posted. This is an accounting shorthand to save space.
In Tr#1 the owner invests $100,000 into the business. In Tr#2 the owner buys $10,000 in furniture inventory for cash. In Tr#3 the owner sells the entire inventory at a 100% markup.

In the Accounting 101 course below we analyze and post a total of twelve transactions, showing sales, buying on credit, closing, etc.
A transaction is any business activity that has an effect on your balance sheet or income statement. Posting is entering the numbers for a transaction into two or more accounts. The DR and CR entries for each transaxtion must balance.
Accounting requires a special kind of thinking that not everyone feels comfortable with. If you are a “sales person” who loves people and hates numbers, you may struggle with accounting for a while. It’s ok to struggle. It’s not ok to run a business without having a solid grasp on how to keep your employees honest. So stick with it.

Analyze & Post Tr#1: DR 100 Cash = 100. CR 300 Owner Equity = 100. The asset Cash is increasing thus DR of 100. Owner’s Equity is increasing, thus CR of 100.
Analyze & Post Tr#2: DR 102 Inventory = 10. CR 100 Cash = 10. The asset Inventory is increasing, thus a DR of 10. The asset Cash is decreasing, thus a CR of 10.
Analyze & Post Tr#3: DR 100 Cash = 20. CR 400 Sales = 20. DR 500 COGS = 10. CR 102 Inventory = 10. Furniture cost 10. 100% markup means Sales are 20 in cash. Cash Sales are increasing, thus Cash DR of 20 and Sales CR of 20. COGS expense is increasing, thus DR of $10. Asset Inventory is decreasing, thus CR of $10.

Pretrial Balance & Income Statement

We pull a pre-closing trial balance to be sure all our accounts are in balance. Then we will close accounts and create statements. Remember, the pre-trial balance includes transactions you have not seen. Below is the Trial Balance prior to closing. Also shown is the Income Statement for the period. Note how the Income Statement flows from the Income Statement accounts, prior to closing.

Closing the Books & Statements

We close the sales & expense accounts, as follows:

DR 600 Close 60 (from COGS)

DR 600 Close 12 (from Selling Expense)

DR 600 Close 25 (from Other Expenses)

CR 600 Close 120 (from Sales)

This leaves CR 23 in the Close account.

DR 600 Close 23. CR 300 J Furnisher 23.

Below are shown the post-closing trial balance, balance sheet and income statement for the first period of activity. Note how the Balance Sheet flows from the Balance Sheet accounts after closing. The Income Statement is repeated from that shown on the pre-closing page with the addition of some percent’s.

Jonas made $23,000 during her first period in business. This is 23% on her original investment of $100,000 and 19% on sales for the month. Her gross profit is 40% of sales.

Making Small Changes

Now let’s demonstrate the effect of making small changes. Jonas goes to her suppliers and negotiates a better purchase price. She buys her next $120,000 of furniture for $55,000. She also trims her selling expenses by 5% and her Other Expenses by 5%.

She raises her prices by 5% and sells 5% more merchandise. We assume she originally sold 120 items at an average price of $1000. Her sales increase to 126 items. Her average price increases to $1050. Her sales volume increases to $132,300.

By making small changes to each of the critical elements, she significantly enhanced her profitability (31% vs 19%) and added $17,980 to the value of her business (140.98 – 123). Once again the critical elements are: sales volume, price, variable expenses and fixed expenses. To keep the calculation simple, we assume the above changes were made in the original month of business and do not show cumulative statements.

You may want to read or re-read the Tentative Goal pdf, which gets into greater explanation of the key elements of sales volume, price, variable expenses and fixed expenses.

Let’s Make It Happen

We conclude this section by encouraging you to take steps to make your goal realistic. Click the link below to strengthen your business. We look forward to helping you build your business and developing the resources to help others.

Strengthen Your Business

Click Accounting 101 above for the full course. It’s free.