PROFIT ENGINEERING FOR DUMMIES

IF IN FACT IT WERE THAT SIMPLE, NO-ONE WOULD HAVE A LINE ON THEIR FINANCIAL STATEMENT THAT READS "PROFIT/LOSS"

There is however an excellent formula that serves as a wake-up call for hotel & restaurant owners, managers, supervisors and employees whose interest it is to make a profit or at worst, Break-Even.

The formula is Q(P-V)= F+Profit

This little recipe for success is still a recipe for which the most important ingredient is experience. That is where I come in!!

Here is my explanation for this simple excercise that asks,

"How many do I have to sell at this price to cover my fixed costs and reach my desired annual profit level of $X?"

This can apply to anything but in my line of work usually applies to bedrooms or restaurant covers. Here is the translation of the  Qs, Ps, Vs and Fs. However it works for widgets too!!

Q = How Many Units, (or Quantity) do I have to sell to make the profit I want?

P = Price....what is my average sales price for the item to be analysed?

V = Variable Costs....what is the Variable cost per item sold?

F = Fixed Expenses.... what are the annual Fixed Costs that have to be covered anyway regardless of amount sold?

There are four areas where true experience enters this excercise and for which the novice may need some help,

1. Variable Costs. What are truly variable costs per unit? Is that enough? Could more be variable? What systems are in place to ensure variability? What can reduce the variable costs?
2. Fixed Expenses. What are truly fixed expenses? Should some be more variable? Are too many expenses considered fixed?
3. Price. Is the price properly positioned? Should it be winched up .....or down? Should a portion be winched up and a portion winched down?
4. Quantity. How do we get from present volumes to the needed volume to reach our goal? What strategies need to be changed? What ideas need to be dumped?

The good news is that if you know where you are going, there is a good chance you will get there but if you do not know where you are going, you will never get there!!

You then go through the excercise of answering the questions that can be answered.

EXAMPLE:

1. What is the price? The ADR is $120.
2. What are the variable Costs? After careful analysis, the answer is say, $27.50
3. What are the fixed Costs? After a line by line analysis, the answer is say, $3,500,000
4. What profit does the owner expect? the answer is $2,000,000

The formula now looks like this,

Q ($120-$27.50)= $3,500,000+$2,000,000

Which when extended, looks like this,

Q ($92.50) = $5,500,000

Which means, How many times does $92.50 go into $5.5 million

The answer is 59,459 which is 163 room nights per day.

Now the real work starts .....and for real help, contact [email protected]