How Price Affects Gross Margin

How does Price affect Gross Profit/ Gross Margin?

The first step is to understand how a Gross Profit is calculated.

Example

You sell a painting for £100 and you paid £60to produce it, the “cost of goods” is 60%. Gross Margin is 40%. Your gross profit is £40.

Calculation

  • (selling price)- (cost of goods)/ (selling price)

*selling price is also known as revenue

Let’s say you want to reach a specific gross margin and you know the cost

Use this formula

  • (cost of goods)/1-(gross margin %)= selling price

In this example, if you pay £60 for a painting and want 40% gross margin, subtract 40% from 1 to=0.60, so £60/.06=£100 selling price

Here’s an example using the same numbers as above. Let’s say your cost on a product is £100.00 and you want to make a 20% gross margin. Subtract 0.2 from 1 to get .0.8  and £100 / 0.8 = £125.

If you prefer you can use an online calculator

Now we can look at Mark Up (It’s subtly different and people get confused, myself included. so I refer back to these notes.

Markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.

Calculation

  1. determine your COGS (cost of goods sold). For example  £40
  2. find our your gross profit by subtracting the cost from revenue. We’re selling for £50  so the profit is £10
  3. divide profit by COGS.  £10/£40 =0.25
  4. express it as percentages: 0.35*100= 25%

If it’s easier use the markup calculator 

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

This is handy to know when calculating agency cost for contingent and permanent labour. Make sure when you are doing comparisons to ask the agency if they are using a margin or markup calculation. If you want to buy contingent labour and want to purchase the quick guide click here

 

Break even Analysis Template

Excel version of the PDF break even analysis is available at the bottom of the page.

To break even means you haven’t made any money or lose any money. It is a calculation to examine your margins for setting your prices when comparing against your cost to produce. Analysing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs. A demand-side analysis would give a seller greater insight regarding selling capabilities

Break-even analysis is useful in the determination of the level of production or in a targeted desired sales mix. The analysis is for the companies internal use as a metric and calculations are often not required to be disclosed to external sources such as investors, regulators or financial institutions.

Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of sale. For example, a company with £0 of fixed costs will automatically have broken even upon the sale of the first product assuming variable costs do not exceed sales revenue. However, the accumulation of variable costs will limit the leverage of the company as these expenses are incurred for each item sold.

The calculation of break-even analysis may be performed using two formulas. First, the total fixed costs are divided the unit contribution margin. In the example above, assume total company fixed costs are £20,000. With a contribution margin of £40, the break-even point is 500 units (£20,000 divided by £40). Upon the sale of 500 units, all fixed costs will be paid for, and the company will report a net profit or loss of £0.

Break even analysis excel version to be edited

Stress At Work

Stress at work can be caused by so many things and sometimes there isn’t a reason, little things add up and cause a snowball effect, to the outside world you have it all but inside you want to be free. Though my blog normally concentrates on templates relating to work for procurement professionals, I have decided to post an emotional piece because we are only human and we get stress at work.

Your wings already exist all you need to do is fly. Work whether if its permanent or temporary is a place that you spend 50% of your day, equal to the same amount if the time that you spend at home with family and friends.  Some things in life are permanent but a job isn’t one of them. If you are feeling tied down to something that you no longer enjoy don’t be afraid to take a risk.  At the same time don’t be reckless, your reputation is important, the most important thing to remember is that you have a choice, don’t let others sway your decisions, come back to your inner self and believe that if you want to fly the nest when your ready you already have what it takes. If your wings need strengthing before you can fly, take the time to nurture yourself. If your line of work is procurement and you want to work with me as your coach to speed up your progress, I can provide procurement coaching. If you prefer a lifestyle coach click here

Difficult roads lead to beautiful destinations. Life is one big road trip, sometimes you can be on a road seemingly never ending with the same grey scenery. The next day the sun’s out and you have arrived at a beautiful destination. Take one day at a time because you never know where you might end up!

ok, that’s a slight exaggeration but with good planning, you can do a lot more. I say to my husband I am retiring at 60 even though the official retirement age is a lot higher. I want to have my mortgage paid off and living a free life. To hell with it I want to live freely before I’m 60. I don’t want to wait until I’m old before I have my freedom, what if I get ill and die next year or even next month. I’m willing to earn less but I’m not willing to compromise on my rates charged, therefore I will work earn a lot but work less! The perfect recipe for a good life. My skills for hire are only suitable for those who need procurement support so if you need a consultant or a retainer get in touch!  If you want something you need to plan for it, life isn’t a bed of roses where you get everything free unless you were born with a silver spoon in your mouth. Take chances, get your head into gear and save, save, save. Earning money is important, spending it is delightful but saving it allows you to what you want. You will know when that moment hits you when you want to make that decision to what you want, even if it flies in the face of convention.

Finally, every day is a second chance. You might think you’ve blown it but people are forgiving if you are genuine. Everyone makes mistakes some little and some big, the main thing is to take ownership of your decisions and learn from your mistakes.

Stress at work is something that can happen to any of us and strike when least expected.  You are not just one job, you are the sum of all of your achievements.  Find a way to re-connect with yourself and one day everything will fall into place!

SWOT Analysis

Simple SWOT Analysis for Procurement Professionals

Company Name
Business Planning Checklist
Using the Strength, Weakness, Opportunity, and Threat (SWOT) analysis framework, develop a checklist of the key activities that need to be performed when preparing a formal business plan in the table, below.
Activity Owner Completion Date
Strengths: Define the company’s current mission statement.
Strengths: Identify market segments in which the company will participate by conducting primary and secondary market research.
Strengths: Identify the company’s value proposition and how it will differentiate itself within the marketplace.
Weaknesses: Identify any barriers to market entry (for example, capital requirements, technical barriers, patents, and process barriers) that the company needs to overcome.
Weaknesses: Identify any risks inherent to the organisation that need to be mitigated so that the company can realise the business plan.
Opportunities: Identify areas where the current market is underserved that provide an opportunity for the company.
Opportunities: Identify any key processes, intellectual capital, or other resources that the company can use to its advantage in the marketplace.
Threats: Identify primary competitors, and then analyse competitor performance by using all available data and additional data that can be verified.
Threats: Identify secondary and potential future competitors that might affect the business plan.
Threats: Develop strategies for mitigating primary and secondary competitive threats.
<Add additional key business plan activity.>
<Add additional key business plan activity.>
<Add additional key business plan activity.>
<Add additional key business plan activity.>

Using a SWOT analysis is a powerful tool that is simple to use but effective in helping you understand your strengths, weakness, opportunities and threats. When you take time to understand the weakness and threats you are taking the first steps to actively manage and reduce threats. Don’t be caught off-guard because you never know when something unexpected might happen, business is volatile and risks can crop up when least expected.

If you like the SWOT Analysis you might also like some other templates

RFI IT Software

Bullet points on what to include when issuing an RFI for IT Software

Briefing Document: A document which briefly summarises the project objectives, timescales, and the RFI/RFP process. Include a table of key dates, and be sure to include information about what you expect the supplier to include in their response.

  • Architectural Diagram(s): If relevant, it can be beneficial to include a diagram which summarises your current architectural landscape. This can help the vendor to understand the key systems that they will need to integrate with.
  • Response document: This should be a document which the vendor completes and returns. It can be useful to use a spreadsheet, with different worksheets for different areas.

o High-Level Requirements: A worksheet which contains the most significant high-level requirements for the project, along with space for the vendor to indicate how their solution would meet the requirement.

o Architecture: Questions relating to the architecture of the solution.

o Infrastructure: Questions relating to the infrastructure that the solution runs on.

o Licensing: Questions relating to the type of licensing agreements.

o Support Arrangements: What level of support is available, and how is it provided?

o Supplier/provider Company: Questions relating to the company, e.g. number of staff, locations etc. Are they capable of providing you with the level of support you need?

You may also want to consider holding a teleconference or meeting with each vendor shortly after they receive the RFI pack. This will provide them with the opportunity to raise any questions or concerns and will enable you to explain the project and RFI/RFP process in more detail. You will need to give the vendor a reasonable time to complete the RFI, to ensure that you get a quality response.

If you require a more generic RFI document you might like the RFI template.

Social Media RFP

Note this social media template RFP is from Hootsuite

[Your company name]

[Website] [Address] [Contact person’s email/phone number] [Project Name]

[Date]

Project introduction

[Your company name], a [description of your business], is in need of [description of work/project]. We are accepting proposals in response to this request for proposal (RFP).

Project purpose and description

The purpose of this project is to [explain in detail why your company needs the work done].

This project requires [outline the duties and responsibilities associated with the project]. Our goals are to [i.e. build brand awareness, gain new social media followers, etc. List however many you have]:

  1. [Goal 1]
  2. [Goal 2]
  3. [Goal 3]

Proposal guidelines

In order to be considered for [project name], all bidding agencies must [list the requirements that each responding proposal must address, i.e. budget, timelines, and submission due date]:

  • Include a price proposal for the work, which should be no more than [dollar amount]
  • Outline a project timeline, including details such as key milestones and deliverables
  • Submit the application no later than [proposal due date]

Bidder qualifications

In order to be considered for [project name], all bidding agencies must [list the criteria that must be met in order for a proposal to be considered, i.e. agency experience and history, information on agency size, organizational charts, executive background, etc.]:

  • Have training in social media marketing and show certification [Hootsuite’s social marketing education and certificate program, for example]
  • Reference and outline relevant work/project experience in social media marketing
  • Provide a list of all personnel who will be working on the project—include resumes for each individual

Timelines

[Outline here information about the timeline for the RFP process as well as the project itself—known deadlines, milestones, and potential roadblocks.]

Request for proposal timeline

Proposals in response to this RFP are due no later than [date].

Evaluation of proposals will be conducted from [date] until [date]. We will notify bidders during this time if any information or discussions are needed.

The winning proposal will be chosen no later than [date].

Upon notification, the contract negotiation with the winning bidder will begin. Contract negotiations will be completed by [date].

Notifications to bidders who were not selected will be completed by [date].

Project timeline

Project initiation phase must be completed by [date].

Project planning phase must be completed by [date]. Project planning phase will determine the timeline/schedule for the remaining phases of the project.

Proposal evaluation

[Your company name] will rate each application based on the following factors [in as much detail as possible, list the criteria that will be measured and describe what is suitable for each criteria]:

  • Relevant training/work experience [detail minimum requirement]
  • Samples of past work [explain how you would like this delivered]
  • Cost vs. value: Bidding agencies will be evaluated on the cost of their proposals based on the outlined scope of work

You might also like a generic RFP template

What Is Commissioning & How Is It Different to Procurement?

A brief introduction to Commissioning and Procurement

Commissioning is buying services for the public rather than an organisation, it is a defined approach to planning and resourcing public services.

Cabinet Office 2011 describes it as The cycle of assessing the needs of the people in an area, designing and then achieving appropriate outcomes. The service may be delivered by the public, private or civil society sectors.

Procurement is not commissioning. In this instance procurement is an element and specific part of the commissioning process.

i,e the procurement process will help appoint a supplier to carry out services

negotiate the best deal to ensure value for money

Monitor contract performance to ensure that it’s running effectively

Commissioning is useful when:

  •  Competition exists and suppliers want to provide their services
  • There is a compelling need for change
  • Change needs to be managed and should not be left to market forces

A procurement exercise to acquire goods and services is a key part in securing local services. Procurement strategy is driven by intelligence gathered in a commissioning strategy and can support in the following ways:

  • Invitation to Tender
  • Develop a robust SLA
  • Appoint a supplier to manage grants
  • Appoint voluntary organisations to do outreach work
  • Set up framework contracts to provide services for individuals at fixed rates

Writing a strategy

  1. Describe how you are going to effect change to meet the needs of the population
  2. Specify the outcome, the desired results
  3. Define the output
  4. Agree on ways of working
  5. Agree on inputs and resources required to deliver
  6. Write a business case
  7. Undertake a cost-benefit appraisal
  8. Write a market position statement to bring together data from the joint strategic needs assessment,  strategies, market, customer surveys into a single document.

This is a brief introduction on how commissioning differs from procurement if you need more information the Institute of Public Care is a good starting point.

Material Change to Specification Is It Dangerous?

What happens if you change your specification and its a material change after the tender has been issued?

What happens if our requirements change during the course of a procurement?

Any change to the specification must not be a material change.

The acid test is would a supplier who made a decision not to submit a tender or an expression of interest do so had the proposed change been in the tender at the beginning? If the answer is yes then this is classified as a material change. In this scenario, the best option is to stop the procurement and start again with the new requirement included.

Let’s review whats allowed in The Public Regulations 2015 and  some case law (National Savings & Investments (NS&I) and Atos IT Services Limited (Atos) ) on Material change

Regulation 72(1)(e) (non-substantial variation) of PCR 2015 states that

“Contracts and framework agreements may be modified without a new procurement procedure in accordance with this Part in any of the following cases:

…(e) where the modifications, irrespective of their value, are not substantial within the meaning of paragraph 8”. Regulation 72(8) states that, inter alia, “a modification of a contract or framework agreement during its term shall be considered substantial for the purposes of paragraph 1(e) where… (d) the modification extends the scope of the contract or framework agreement considerably”.

On application of Regulations 72(1)(e) and 72(8) to the facts of the case, the court found that Edenred’s argument that the amendments to the Contract included services which were not originally contemplated and which amounted to a material change did not satisfy the requirements of Regulation 72(8). This was on the basis that:

  • the OJEU Notice set out the intention to expand the B2B Services up to a maximum value of £2bn
  • the advertised contract and related procurement documents envisaged and catered for an expansion of the services as was being contemplated and further stated that the winner of that contract (namely Atos) should be capable of providing such additional services in the future
  • the original procurement process and ultimately the contract awarded to Atos in 2013 was unchallenged, and
  • “contract documents” should include reference to all tender documents, which included the OJEU Notice, where the potential expansion of services was unequivocally set out.

The court also applied Regulation 72(1)(a) which states that

“where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses, which may include price revision clauses or options, provided that such clauses (i) state the scope and nature of the possible modifications or options as well as the conditions under which they may be used, and (ii) do not provide for modifications or options that would alter the overall nature of the contract or framework agreement…”.

The Supreme Court held that the change provisions in the Contract were sufficiently clear to meet these criterion, namely that they restricted the additional services to the B2B Services outlined in the OJEU Notice and also set out some guiding principles for the inclusion of the new services in the Contract so as to restrict any increase in Atos’s profit margin and to prohibit changes to risk allocation under the Contract. This, in turn, satisfied Regulation 72(8)(c) in relation to a change in the “economic balance” of the parties under the Contract.

Can contracting authorities protect themselves from a challenge for material change by including all potential future changes and additional services which may be required in the OJEU Notice?

 

 

Contracting Authority Public Sector In-House Bids

If you are a Contracting Authority should you consider in-house bids?

The first thing to consider is whether if you are allowed to submit a bid. Your in-house team must be a separate entity by forming a company or legal entity that can enter into a contract with the contracting authority. The in-house bid has an unfair advantage because it would be relying on the contracting authorities premises, and assets etc.

An authority could use a tender to help it decide whether if it wanted a make or buy solution. The internal bid would be for the make solution, however, the authority would need to make it clear in the tender instructions that there is an option to abandon the tender process and not award the contract.

Suppliers in the market may not want to enter a bid if there is a chance that the tender could be scrapped. They may also be wary about sharing commercial know-how and view the tender exercise as a fishing exercise for ideas generation rather than genuine desire to award a contract.

This could send the wrong message to the market may be that the authority is not serious about outsourcing its requirement and the contracting authority should take into account their reputation requirements. Next time they may find that they have fewer suppliers bidding. Some suppliers might be put off which means there is a risk that the best solutions are not being put forward

Defending a challenge might be more tricky. Conflict of interest will need to be de-risked.

Are there any advantages?

An in-house team operating as a separate entity know the culture and systems in place at the Authority and may be best placed to deliver a cost effective solution.

In RMP v Brent, the London Borough, together with several similar boroughs, clubbled to together to create a mutual insurance company called London Authorities Mutual Limited (“LAML”), a private company limited by guarantee established and wholly owned by the local authorities concerned. Earlier, Brent had also commenced a procurement process inviting bids from insurance providers, of which RMP was one. When the project to establish LAML became a reality, Brent terminated the procurement process it had been running and entered into a contract directly with LAML with no further competition. RMP brought a claim arguing that this contract should have been opened up to competition.

Brent had also started a procurement process inviting bids from insurance providers. RMP was one of the bidders. They then stopped the procurement process.

A claim was brought by RMP because there was no competition in scrapping the procurement and awarding to the mutual instead. (part-in house) relying on the  exemption in the Teckal case aka the  contracting authority has set up a wholly-owned service provider:

  •  exercises a degree of control similar to that which it would have over one of its own departments (the “control” test); and
  • the service provider carries out the essential part of its business with the owner contracting authority/ies (the “function” test).

The Court of Appeal in 2009 upheld RMPs claim that the Teckal exemption did not apply, on the grounds that the necessary degree of control was not established.

However, the Supreme Court has overturned the decision of the lower courts. The key points were:

  • that there was always the possibility of 75% of the local authorities “directing” the company via the special resolution procedure.
  • the fact that a local authority could not vote in relation to discussion of its own insurance claim did not automatically signify that that local authority did not have the necessary degree of control, in the round and jointly with the other local authority shareholders; and
  • the fact that there were two independent directors was not fatal to the control test either, particularly as this is now a requirement of the FSA.

The purpose of the procurement rules, it said, is to preserve competition and prevent unfair discrimination against bidders. Contracting Authorities can choose to do work in-house if they choose to do so. Genuine cooperation is allowed.

 

 

The BCG BOX

In the 1970s Boston Consulting Group developed The BCG Box as a method for assessing the value of investments in a company’s portfolio.

Cash Cows

High market share but low growth rate. They don’t cost much but yield high returns. Companies should milk them for all they are worth!

Stars

High market share and high growth rate but devour money. The aim is to convert stars into cash cows. Invest wisely!

Question Marks

High growth potential but a low share of the market. In the right circumstances, they can be turned into stars. It’s a tough decision on growing this quadrant!

Dogs

Business units with a low share in a saturated market. Dogs should be held onto only if they have a value other than a financial one. e.g. vanity project!

Consider supplier perception and where you sit on the BCG box. Useful questions to ask, are you part of their top 10 suppliers or are you viewed as a low-income client but strategically important to be linked with?

BCG reckons one of the biggest challenges in procurement is working with a supplier that has no competitors. How can you beat an unbeatable supplier to remain competitive and reduce your procurement costs?

Use contract management to improve the supplier relationship. How can you get a win-win situation, no one stays on top forever, there may be no competition now but that doesn’t mean it will always remain that way.  Reason with the supplier to level the playing field.

Try decoupling or seeking new arrangements. If the supplier feels like they have a monopoly and treat you unfairly, try altering the demand by reducing volume, going elsewhere where you can or become a bigger customer by joining a consortium or buying group to become their No.1 customer. (or as close as possible)

Give smaller players a chance and develop the market to increase competition