A cash profit is the amount of money that a company earns after all costs have been subtracted from revenues. These costs usually include things like labor, taxes, and overhead.
The cash profit is then divided by the total amount of sales to find the unit margin; this figure represents how much each item sold generates in terms of profits. It can be expressed as a percentage or as a dollar value. The margin on an item becomes smaller when it has a larger cost associated with it, such as more expensive raw materials or increased labor wages.
The size of a business’s cash profit may be influenced by the business’s overhead costs and buying power. If overhead costs are high, profits may be smaller since the amount available to cover buying power is less.
For example, if a sportswear manufacturer uses very expensive fabric to make its products, it will likely have to charge customers more for its clothing in order to make up for the additional cost. When added together with already fixed and variable costs, this increase in manufacturing cost will reduce the company’s profits.
With businesses that sell goods overseas, a decrease in purchasing power may also affect cash profit. When the U.S. dollar falls in value against other currencies, businesses don’t have to pay as much for materials and labor when they import them into the U.S.
This is called foreign currency translation, or Forex for short. For example, if a sportswear manufacturer sells its clothing in Europe, it will likely have to charge customers more since it will have to buy the fabric and labor-intensive work processes overseas instead of in the U.S. If a company has lots of foreign sales, this may cause overall cash profit to decrease even though individual expenses haven’t changed at all.
In order to maintain cash profit, companies often try to increase their on-hand inventory. In other words, the company needs to keep more product in stock than it would like to sell just to make current expenses covered. Having extra product in stock may also cause a company’s products to be less expensive and desirable, which will decrease profits.
When calculating cash profit, it’s important to factor in how much purchasing power each customer has and how much of an impact they have on the company’s bottom line.
For example, if the company sells $1 million worth of merchandise to a customer at the high pricing mentioned before, this would cause a $250,000 cash profit. However, sometimes there can be lost revenue if a customer is only interested in specific products.
If all of the company’s production is geared towards making products for this one customer who buys $1 million worth of products at once, then the company has nothing to offer other customers and sales will drop until the inventory of that specific product is sold. In order to keep profits up and avoid carrying excess inventory, companies often maintain a minimum level of cash profit per period or per year in order not to drown in unsold items or miss opportunities to sell their products.
This knowledge is used to determine what to stock in the store. If you are planning, stocking and selling too much or too little, then you will lose money. Your inventory needs to be just enough that it can sell quickly but not so many that they sit there taking up space and taking up space forces you to lose money.
Here is a good example of how a company uses this knowledge:
A company deals with two types of customers: New customers, who buy an item every month, and old customers (known as regulars), who have bought many items from the company in the past. The old customers spend more money than the new ones and bring in more sales revenue. The New customers each spend many different amounts, which is seen as a bad cost of goods. Each customer spends $75 per month, but this is also the cost of goods sold and that can be considered a blemish on the company’s cash profit. The old customers, who buy more expensive items than the new ones, spend an average of $110 a month, but this means that there are no costs of goods sold.
To get rid of the COGS problem, you should do one or both of these things: offer new customer incentives such as discounts for their first purchase or for their first few purchases; and charge new customers more until they become regulars. How much do you charge depends on the product and its price. You can lower the price of your products, or you can offer a price break for those who buy in bulk. Either way, you need to understand the customer’s purchasing power. He may not buy your products because he thinks they are too expensive, but he may be willing to spend more when that is not the case. This is a bad cost because it will cause cash profit to decrease even though variables and fixed costs haven’t changed at all.