On Target 12 – Adding profit to cost
So far, I have covered the direct costs of operation and included the overhead, to bring the daily contract cost to £378.50 per day. This is the purely the cost to provide the service but does not include any profit.
Last time I looked, as well as providing a social service and generally having a good time, I needed to earn a profit, in order to invest in the business and its staff. The margins in our industry are never going to be in the league of Amazon, and even Tesco in a good year doesn’t make more than 4%, despite their often adverse headlines. I am therefore never too ambitious in that direction. That said, I aim to achieve 5%, before tax but after interest. Enough hopefully, to pay me a dividend as a more tax-effective way of earning a crust.
The proper price is therefore:
|Direct Cost||Overhead cost||Total cost||5% profit margin||Total (per day)|
|£305.90 per day||£72.60 per day||£378.50 per day||£18.92 per day||£397.42 per day|
I now ask myself this question: can I save costs, to reduce the price to the client, without compromising my profit margin, which isn’t anyway outrageous? All that aggravation and potential to go wrong for £18.92 per day! It is for this reason, I like ‘open book’ tendering, to show my costs and the reasonable profit expectation. Unfortunately, in my experience the school sector isn’t interested in how you achieve the price, but I tell them anyway.
These are the questions I ask myself:
- Q Are any of my costs likely to reduce over the 5-year term of the contract?
- A Not much chance of that. Fuel might go up and down, but a small part of the whole in this case. Will wages go down? They never have in the past.
- Q Can I persuade a driver to drive the coach only when it is needed on the contract and not be paid for the gap in between? Thus, reducing the costs including holidays, etc.
- A I have had people who will do that, but they are few and far between and usually older, in semi-retirement perhaps. However, I have been caught out, when they decide they want to retire or leave for whatever reason and I end up with a full-time driver doing the job. Five years is a long time in the coach business, so the answer is no!
- Q Can I find an infill job, to complement the am/pm school peak requirement?
- A Not now, although I will always look for a gap filler. School field trips are an obvious place to start, but most tend to be in the peak summer period, when I have more flexibility by splitting the out and back school runs, to fit in a full day and maybe an evening job. I take the view, as my intended margin is modest, that any benefit I can get through infill work is a way of enhancing the company’s overall profitability to something approaching 10%
I can’t see scope for reduction, especially as I already allow for splitting costs out over 240 days, therefore relying on others to use the coach when the school isn’t. A risk, but I usually achieve that target, although not always with full days. I sometimes wonder why I do such contracts, given they are not hugely profitable. The latter is true, but at the right price, they assist cash flow and even out the seasonal peaks.
You may recall, this contract requires a fixed price over the full five years. So even at just 2% increase in costs each year, the real price at the end will be 10% less and I only have 5% to play with! So, I need to build in an allowance to ensure I keep pace with rising costs. I understand why authorities like to have a fixed cost, but they must realise it gets added on somewhere, or at least it should. I have tendered for other work, which requires a lower price at the end, apparently possible through “efficiencies”.
I will be very optimistic and assume, like the government, inflation will average 2% each year. The table below shows the effect.
|Year||Total price + 2% after year 1||Average (divide total by 5)|
|Total||£2,068.17||£413.63 per day|
This demonstrates a middle price, higher at the outset, but lower at the end of the contract period in real terms.
The contract price per day is therefore £413.63. I will round to £413 for tendering purposes. Would it look better if it was £399? Yes, but a contrived price is obvious, I prefer to be clear. You never know they might ask me to review my price, it wouldn’t be the first time. A reduction to £399 a day, however, would cost £13,300 over 5 years, representing nearly 69% of the profit! Small changes make a big difference.
These are my costs, yours will be different, especially if a cheaper vehicle can be used and lower labour rates, but for how much longer? The formula is the same whatever the individual figures. Don’t be a busy fool!