barrow boy's guide to profit

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Barrow Boy’s Guide

to Profit

Business Finance Training


Barrow Boy’s Guide

to Profit


Bazzer’s



The recession has pushed many businesses in to bankruptcy, including some famous high street names.

But come boom or bust, businesses like Bazzer’s fruit and veg stall always do well.

How do they do it?


Barrow Boy’s Guide to Profit

• Bazzer’s business secrets

– Bazzer has a clear business objective and strategy

– He knows what his customers want

– Bazzer is master of the essential business finance skills

– And managing cashflow is his number one priority

It’s far too important to leave to my accountant



• Cashflow is the ‘lifeblood’ of the business

• But how do you get strong cashflow?

– Ready access to additional funds

– Good working capital management

– Strong profits

Strong profits are the key to growing your business



• Making strong profits

– The profit concept seems straightforward

But not all costs work in the same way!

Revenue minus Costs = PROFIT



• How Bazzer runs his business

Selling price of one box of fruit £15.00Cost of one box of fruit £10.00Gross margin £ 5.00

I make a £5 margin on each box of fruit I sell





Daily cost of renting the market stall = £40.00

I pay £40 each day to rent the market stall pitch






The stall rent is paid for after selling £40.00 = 8 boxes of fruit £5.00

So the stall is paid for when I’ve sold 8 boxes of fruit

Accountants call this the break-even point



• Break-even point

– The most important dividing line in business

– It’s the sales level at which the business just covers its costs

• Below break-even sales level the business will make a loss

• Above break-even sales level the business will make a profit

I always know what the break-even point is for my stall




– Based on the principle that there are two kinds of business costs

– Variable costs

• Change with sales level

– Fixed costs

• Change with time






Variable cost

Fixed cost



• Gross margin

– Gross margin = sales minus variable cost

Sales are very important

But gross margin is the REAL income of your business




– Work out your break-even point

– By dividing fixed costs by gross margin

Break-even point = Fixed costs

Gross margin



• Gross margin

Selling price of one box of fruit £15.00Variable cost £10.00Gross margin £ 5.00

Fixed cost £40.00

Break-even point = £40.00 boxes of fruit £5.00

Break-even point = 8 boxes of fruit

Which means that once I’ve sold 8 boxes of fruit I make £5 clear profit on every additional box of fruit I sell



The gross margin and break-even idea seems obvious but not everybody gets it.

Take my mate Frank, for example. He has a nice little wholesale business selling women’s clothes.

Sales and profits at Frank’s Fashions have been going down over the last year or so - Frank got in to a bit of a panic thinking how to improve things.

He started talking about reducing the price of his best selling items so he could get the sales level back up.

Luckily I managed to talk him out of it!



• Managing gross margin: Frank’s Fashions

Selling price each £100.00Variable cost each £ 75.00Gross margin each £ 25.00

Annual sales units 1,000Gross margin from sales £25,000

This is one of Frank’s best selling items – it made £25k margin last year

Ladies cashmere overcoat:






Before After

£ 90.00 - 10%

Frank was going to reduce the selling price by 10%







Before After

£ 90.00 - 10%

But that would reduce the gross margin on each coat by 40% !!

And remember – gross margin is the REAL income of the business


£ 75.00£ 15.00 - 40%






Before After

£ 90.00 - 10%


£ 75.00£ 15.00 - 40%

1,200 + 20%

Frank thought the price reduction would increase sales units by 20%






Before After

£ 90.00 - 10%


£ 75.00£ 15.00 - 40%

1,200 + 20%

But margin from sales would still be 28% less than before the price cut

£18,000 - 28%






Before After

£ 90.00 - 10%


£ 75.00£ 15.00 - 40%

1,667 + 67%£25,005

Frank would have to sell 1,667 coats to make the same margin as before

That’s a 67% increase in sales – it’s never going to happen!



• So how can Frank increase profits?

– Increase sales volume - sell at same price and gross margin

Frank could try advertising as a way to increase sales volume





– Increase price and gross margin - sell same volume

Bet you’re thinking that if we increase the price the sales will drop

That doesn’t necessarily mean Frank will be worse off – look at this






Before After

£110.00 + 10%


£ 75.00£ 35.00 + 40%

Increasing the selling price by 10% increases gross margin by 40%






Before After

£110.00 + 10%


£ 75.00£ 35.00 + 40%

700 - 30%

Even if sales fell by 30% Frank would be hardly worse off in margin terms

£24,500





– Increase price and gross margin - sell same volume

– Reduce break-even point

• By reducing variable costs to increase gross margin

• By reducing fixed costs

Frank could replace that fancy Jaguar sports car for a start!



• Bazzer’s pukka profit rules

– Cashflow is the lifeblood of the business

– Strong profit is a vital source of additional funds

• Gross margin is the real income of the business

• You can’t make a profit until sales exceed break-even point

• In other words until gross margin covers fixed costs

So make sure you check gross margin before you change your prices!


Look out for my Barrow Boy’s

Guideto Cashflow



Business Finance Training the cost effective way to improve business results

Paul Lower FCMA