Continuing the theme of sales, we welcome back Ellen O’Hara, Head of Business Development at Cockpit Arts for this post on setting targets. Look for a free worksheet to download towards the end of the post.
Some tips, tools and learning on calculating an annual sales target for those self-employed, product based businesses among you. These are drawn from a workshop series entitled ‘Creating An Outline Business Plan’, which I recently delivered at Cockpit Arts for an enthusiastic group of self–employed designer-makers.
The first workshop began with some exercises on defining success and articulating values. Each participant’s tasks was to clarify which rewards they were hoping to reap from their self employment.
It was pretty clear that most people had no problem describing what they wanted to gain in personal and creative terms. However, most of the group had trouble defining financial success and what money meant to them. I recommend working through these exercises as they can be quite illuminating – a worksheet can be found on our website here.
So, as we moved on to ‘goal setting’, we spent some time discussing ideal levels of drawings – i.e. the amount you take from the business for personal use when you are self employed. This figure ranged enormously from person to person, but overall, most makers were aiming to generate enough profit to enable them to pay themselves at least £30k pa in the medium-long term.
Using break-even analysis as the basis, the group then spent some time with their calculators working out what level of sales they would need, at current costs and prices, in order to achieve that level of target drawings and cover other costs To do this for your business, you will need:
- Total annual fixed costs: including studio and related costs, marketing and sales costs, administration, any permanent staff.
For example £10,000.
- An annual drawings target: i.e. the amount you would like to pay yourself from the business.
For example £25,000.
- Average selling price for one unit of your work: if you find this tricky, you could use the price of your best selling product, or a mid point between wholesale and retail prices.
For example £150.
- Average variable cost for one unit of your work: this would include materials, small replaceable tools, production outworkers, packaging if you always supply this with your work, research and development costs and other costs related to the production of your work. Again you may wish to use your best selling product as an example.
For example £40.
Sum your total annual fixed costs and drawings target.
£10,000 + £25,000 = £35,000. We’ll refer to this as A.
Subtract your average variable cost per unit from the average price per unit to work out the profit per unit.
£150 – £40 = £90. This will be B.
Divide A by B to give you the volume of sales you would need to achieve in a year to cover your costs and acgieve your drawings target.
£35,000 / £90 = 389 units
Finally, multiply this volume by the average selling price per unit to calculate your annual sales target.
389 units x £150 = £58,350
Bear in mind that this assumes fixed costs and prices, and doesn’t account for you putting cash away for next year’s tax bill or retaining profit to invest back into the business. It does, however, start give you a clearer, more realistic idea of type of business activity you need to engage in order to become sustainable.
The exercise raised some interesting issues among for the group. For some it illuminated the need to increase prices in order to improve unit margins, which in turn raised questions about repositioning and branding. For others it emphasised the importance of streamlining production in order to increase production capacity and productivity. For others it was all about controlling costs.
Recent research from Cockpit Arts shows well performing, sustainable designer-makers are generating sales in the region of £65-£70k. But this is with net margins of around 40%.
So what do your figures tell you?
For ease you might want to use this breakeven tool, which you can incorporate a retained profit target into. Download worksheet here.
Ellen O’Hara, Head of Business Development at Cockpit Arts.
A summary of out recent research report can be found on our website.