Covering the Costs

I'm often asked how to work out how much additional income has to be made to cover the additional cost of employing another member of staff or any other increase in overhead. The calculation is critical to ensuring you stay in control of your business and simple if, of course, you have the right information to hand.

In this example the gross profit percentage [(gross profit £ / total sales £) x 100 = GP%] is 30%. You will get the information from your last set of annual accounts and in some cases your accountant will have done the percentage calculation for you. Lets say you are about to start an advertising campaign which you calculate will cost a total of £5,000 over the period of the campaign. This additional cost needs to be covered by increased income which in this case will be (£5,000 / 30) x 100 = £16,667. Of course if the gross profit percentage is lower then there would need to be a significantly higher level of revenue to cover the cost and if it was higher then not so much revenue needs to be made. Try it for yourself.

The question for you is whether you believe the new truck, member of staff or advertising campaign will generate sufficient to cover the costs - and a whole lot more - or not.