#10 – Ruth’s Rule #1
Over the past two weeks I have given you Ruth’s Rules #2 and #3. Both of these rules determine revenues needed based on overhead expenses.
This week is Ruth’s Rule #1: determining revenue based on direct expenses or cost of goods sold (COGS) expenses.
Ruth’s Rule #1:
Sales = Direct Expense
1 – GM
1 is 100% and gross margin (GM) is a percentage.
Here’s how to use Ruth’s Rule #1:
You are considering hiring a new field employee who has great experience and wants $40 and hour. The gross margin of the service department is 52%. Benefits are 30% of wages and his truck cost is $10 an hour . Assume 2080 hours a year.
Wages = 40 (2080) (1.3) = 108,160
Truck cost = 10 (2080) = 20,800
Total cost = 128,960
Revenues needed = 128,960/.48 = $268,666.70
Can he generate $268,667 a year? If the answer is yes, then his $40 an hour is justified.
Do this calculation for any direct cost employee. If a person wants $30 an hour, calculate how much that person has to generate to pay the $30 an hour.
Next week: More ways to increase profitability.
How financially fit is your business?
Click here to take this one minute assessment.
Books/Audios that could help your business and you.
Casey Brown makes an interesting case for whether you should raise prices and how to raise prices if you decide to do so. She has implemented what she suggests in the book and gives you stories from companies she has helped change their pricing strategy.
Click here to order on Amazon: https://amzn.to/4jjyoSg