The Financial Impact of Wastage
Business owners can often become complacent about wastage, whether it be wastage is terms of product lost, wastage in terms of shop lifting, wastage in terms of productive time or wastage in terms of writing off a bad debt and often it isn’t till you put a dollar factor against that waste, that the cold reality starts to set in.
But what is not clear with many business owners, is how much you need to sell to actually cover the dollar value of that waste. Yes they want to avoid it, but how do they measure it? The cost is different to each business and indeed a profit centre within a business, but what is not different is the maths to determine that loss.
Lets assume you have a gross profit (sales less cost of sales) of 20% and you have identified a bad debt (“wastage”) of say $3,000. The value of sales that you need to make to cover that loss is $15,000.
This calculation is determined by taking the loss ($3,000) and dividing it by the gross profit percentage – in this case 20%, so $3,000 /20% = $15,000. That is an awful lot of sales that need to be made to cover that bad debt. Then add in a bit of non-productive labour, loss of consumables and loss of product for resale and that figure may increase to $5,000, which means you need to sell $25,000 to break even on those costs.
If your gross profit happened to be 30% and you had a bad debt, then performing the same calculation, you would need to sell $10,000 to cover the debt. So the higher the gross profit the business is making, the less you may need to sell to cover that debt.
However, as gross profits come under attack from aggressive discounting, every dollar you lose is going to cost you more.
A sobering thought particularly as school holidays approach and shop lifting may become an issue for some.