# How to cover overhead on every order.



## binki (Jul 16, 2006)

First you need to calculate your overhead. 

Let's say you have:

Rent: $2000
Utilities: $100
Phone: $100
Insurance: $100

Total OH is $2300

Now if your sales are $25,000/mo then your overhead is 9.2% of your sales. 

To cover that you would price out your order and add another 9.2 percent to each order. You could add less or more but not recognizing the true cost of each of your sales will yield false results of profitability. 

If you don't want to add the OH then allocate 9.2% of your sale to overhead for expenses to give you a net profit on the order. 

So if you sell one shirt for $15 and have a $5 cost then add $1.38 to your cost (9.2% of 15) so your cost is 6.38 and your net is $8.62, not $10. If you sold the shirt for $16.50 (rounding up) then your profit would be just over $10.


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## Louie2010 (Feb 26, 2010)

While I agree with your point, that it is very important to be aware of your overhead, I personally don't believe mixing your fixed costs in with your cost of goods sold is the best way to do it. I would though factor in labor though when pricing.

I would instead always try and think in terms of margins and percentages.

Using your example of $2300 fixed overhead you could then look at it any numbers of way, kind of like a map placed before you and plan accordingly.

If you operated at a 10% gross margin you would need $23,000 in sales to break even, every dollar of sales over that will bring you 10% additional profit.

if you wanted to work at a little higher margin, say for example 15% gross margin you would need $15,333.33 in sales and then additional 15% profit on all sales over that amount.

At 20% gross margin you would need $11500 in sales, and make additional 20% profit on sales after that.

Thinking in terms of percentages of gross margins you can easily factor in how easy or hard it would be to achieve the sales you need and if in fact it is worth discounting or instead holding to higher margins. It is kind of like driving a clutch, you want to find that sweet spot when shifting and you can gauge if you should lower or raise prices. If for example you are already busy how much more profitable it is to hold to higher margins. Also in reverse you can easily decide if business is slow if you should lower your margins, and then how much more in sales it would take to make the same profits.

Two important things to keep in mind:

1) Labor, if you are paying yourself, theoretically you could be breaking even as a monthly profit as a business, yet still be making a living. Then as you play around with trying to increase your gross margins you can try and make additional profits for your business. If you are paying someone else you will need to be paying yourself from the additional profits.

2) This is very important. Do not confuse gross profit margins and mark up. Many people confuse these two and slowly run themselves right out of business.

For example, if you wanted to achieve a 20% gross margin you would need to mark up your cost 25% in order to achieve that. If you marked up your cost only 20% your gross profit margin would in reality be only 17%.


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## binki (Jul 16, 2006)

I think you mixed up gross and net a little there but my point was more an answer to the 
'double your cost to get a retail price' argument.

Labor was left out on purpose because it should be part of the cost of doing the job. OH is a fixed amount each month and the excersize was a way to allocate it to each order. Weather you choose to add it on or roll it up is not material, just that it is recognized. 

Now, labor can be figured into OH if you have 40 hours a week at $30/hr or whatever you want. Make sure you used a fully loaded rate that includes payroll taxes and insurance, etc.


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## Louie2010 (Feb 26, 2010)

how did I mix up gross?


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## Louie2010 (Feb 26, 2010)

binki said:


> but my point was more an answer to the
> 'double your cost to get a retail price' argument.
> 
> .


 
I agree, but my point is that IMO using fixed cost in the formula when figuring margins is not the best way to do it.


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## binki (Jul 16, 2006)

I wasn't using fixed costs to figure gross margin but to recognize there is a fixed cost allocation to each job whether you know it or not. once you know it you can use that information to add some spiff to your product or just figure what your unallocated cost per job is 

gross margin is sales price over cost of goods, net margin is total sales over total costs including labor but before taxes. correct?


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## Louie2010 (Feb 26, 2010)

> So if you sell one shirt for $15 and have a $5 cost then add $1.38 to your cost (9.2% of 15)


You were using fixed cost as part of the formula when figuring marking up a sale.

IMO, doing that is not as reliable. Instead however it is better to think in terms of gross margin. When doing so you are able to more accurately figure how changing your margins will affect your sales and profits. Profits that are then used to cover the fixed OH.

Interesting thread by the way, I love these types of topics.


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## TshirtGuru (Jul 9, 2008)

I just charge a crap load more than my cost. 

I just know my overhead is $xxxx.xx, and I need to make $xxxx.xx to make a profit and pay my bills and mortgage. 

I don't know if you guys do this but I actually add my living expenses into my "overhead" so that I know what I need to make to pay all my bills plus add a little jingle in my piggy bank. I feel like if I don't add my living expenses into the overhead, I will make a profit, but not enough to pay the bills.

And I price my screen printing with a price matrix, but I always double check to make sure the price corresponds with my hourly shop profit rate. If the price matrix shows a lower profit margin than my shop rate, I bump the price up. If the matrix is higher than my shop rate, I just make more money which makes me happy.


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## binki (Jul 16, 2006)

our pricing has nothing to do with our costs other than we are selling for more than our costs. we price based on demand so the sooner someone needs it the higher the price.


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## Louie2010 (Feb 26, 2010)

Here is just one very simple example of why knowing your margins can be helpful.

Right now we are in a climate of increasing prices, so I will use this for one example, and just to keep it simple I wont factor in anything but the shirt cost.

A shirt cost $10.00 and currently you are working on a 40% gross margin to achieve the profits you desire. So you mark up the shirt 67% and sell it for $16.70 in order to achieve your target profit margin.

Now you get an increase and the shirt cost goes up $2.00 and is now $12.00 instead of $10.00.

If you just add the increase and sell it for $18.70 your profit margin is now only 36% instead of your targeted 40%. Yes you are taking in the same dollar amount, but your business has just become 4% less profitable. In order to remain just as profitable you would need to now charge $20.00 for the shirt.

Now I am not saying that a person should just blindly increase it to $20 You have to weigh many factors before doing so, an you may decide to lower your margins in order to keep a certain sales volume. But understanding your margins and how they affect your profitability is very helpful in making pricing decisions. It also helps you to gauge whether your business is growing or shrinking over a period of time.


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## binki (Jul 16, 2006)

all good points. the price increases in the textile industry is becoming so large raising prices is not an option. when you do raise your prices with costs your percent margin may be the same but your gross dollar margin goes up.

when your material costs are going up you should be raising prices. this is a great opportunity to increase profitability.


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## Louie2010 (Feb 26, 2010)

binki said:


> all good points. the price increases in the textile industry is becoming so large raising prices is not an option. when you do raise your prices with costs your percent margin may be the same but your gross dollar margin goes up.
> 
> when your material costs are going up you should be raising prices. this is a great opportunity to increase profitability.


 
Yes, understanding your profit margins and how it relates to your actual profit dollars is very important.

Say through a rent increase your fixed overheard goes up $200 or $300 a month one year. How frustrating it is to try and figure accurately how much you should increase each individual sale throughout the month on order to stay at the exact same net profit.

If however you know exactly what your gross margin is it becomes easy to understand how to do so.


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## binki (Jul 16, 2006)

I wasn't using fixed OH as a way to calcate margin but as a way to assign the cost of OH to each sale. I can then decide if I want to add some spif to each job to cover its share of the cost.


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## Louie2010 (Feb 26, 2010)

I realize that, but you were using OH in calculating your selling price and I am not saying it is bad to do, I just believe it is more accurate to instead to use gross margins, and doing so also offers more benefits in growing a business.

But regardless you are correct that many people don't consider their overhead, and would benefit in doing so.


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## binki (Jul 16, 2006)

i was actually looking at OH as a way to figure extra spiff on sales if i so desire. kind of like a fuel surcharge.


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## Louie2010 (Feb 26, 2010)

I understand, and I am not trying to belittle your strategy at all, and I apologize if it came across that way. I just wanted to add to the thread and offer some additional ideas. If someone were to grow into a rather large volume, I couldn't imagine it being a very accurate strategy for a pricing model.

Myself, I am just a small part-timer in this business. However I was previously self employed for many years before this. I was blessed enough to have enough success that about five years ago I was able to retire in my mid forties. With the volume I was doing there would have been too great a variation in sales between different months that trying to guesstimate a monthly sales in order to then guess a percentage of OH to factor into each sale would have been very inaccurate. By using using gross margins to look at how your sales and profits relate to your fixed overhead is IMO more accurate, and much simpler to do.

Again, though I compliment you for this thread, I think it is a great topic, one that sadly too many business owners ignore. Everyone would benefit in taking into account their overhead when pricing regardless of the formula they used. Good job!


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## binki (Jul 16, 2006)

not at all, just pointing out that anyone running OH over a few % of sales needs to look at this. 

for the home based biz as well. you have dedicated sqft to the operation so take that into consideration.


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## Sparkie (Nov 11, 2009)

Louie2010, it is apparent to me that you that you have more experience/knowledge in this area than I do. In pricing my jobs, I took all the following into account as my overhead:

Rent
Lease Payments
Loans
Utilities
Insurance
Supplies
Chemicals
Inks
Salary
Taxes

Now lets take some random figures:

Overhead $6000 per month.
Desired profit each month $4000 per month
Monthly production hours are 100

This puts a break even hourly shop rate at $60 per hour ($6000 / 100)
This puts a shop rate with profit at $100 per hour (($6000 + $4000) / 100)

Lets say prep 1 screen, setup 1 screen print and fold 100 shirts takes one hour
Lets say the cost on 1 t-shirt is $2.00

The break even price to sell these 100 shirts is $200 (cost of shirts) + $60 (1 hour labor) = $260.00

Let's markup the shirts up to $3.00 (50%) add in the $100 (1 hour labor) and I get a total of $400.00

Profit margin is 35% (1 - (260 / 400))

Does this look like a reasonable method for calculating prices?


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## Louie2010 (Feb 26, 2010)

Sparkie, I sent you a PM in reply to your question.


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## VTG (Dec 16, 2010)

Louie, I just sent you a PM. I'd love to read your reply to Sparkie if possible. Thanks.


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## out da box (May 1, 2007)

Then you have to take into account how many productive hours you actually have per month. You have 8-10hrs per day capacity, but are you producing product all day every day?
factoring in down time is another tricky situation.


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