Your GROSS PROFIT MARGIN (GP/GM) is probably one of the most important things to think about in your business. It’s what makes the difference between doing well or scraping by, having enough money to pay all the bills and whether you earn a decent salary or buy own brand all the time.
It’s not your FINAL PROFIT - that’s what’s left after EVERYTHING has been calculated but unless you have a good margin on the cost of your goods (COG’s) and your selling price (SP) there is unlikely to be a profit.
Put simply Gross Profit Margin is calculated as SELLING PRICE less DIRECT cost of goods (flowers and sundries) all EXCLUSIVE of VAT.
In normal circumstances and taking into account a normal mix of fresh flower sales (standard industry mark-up 3x or 3.5x buying price) and sundries (standard industry mark-up 2x) you should be looking at a blended margin of around 60/65%.
So, for example, if your pre-VAT selling price is £55, your flower cost should be £15, your sundries/hard goods £5 which gives you a GROSS PROFIT of £35 (-£15 - £5) or 64%.
Because VAT should not be included in the calculations the actual price the customer pays should be £55 +20% = £66 and this should apply whether or not you are VAT registered – see #2
Now, given current high prices it may well be you aren’t achieving circa 60% GM especially if you haven’t adjusted your prices recently or don’t use the all-year-round pricing model (see #3) but it’s the ideal to aim for.
However, like all rule’s margins can, and should be tweaked when you know there is going to be a high level of sales or when pricing keenly (not cheaply!!) serves an additional purpose like generating customers through the doors or to your website.
And that particularly applies to designs you make at the peaks ... be it wreaths at Christmas, red rose bouquets at Valentine's or hat boxes at Mother's Day. If it is a mass sale line that can be produce almost factory style there are ways to speed it up and produce more per hour. Maybe not as creative as a bespoke one off design but when your productivity rate per hour goes through the roof you actually make more money.
Now how you adjust the price/margin will be your choice.
1: You simply absorb the purchase price difference and stick with your normal dozen red rose price. However, this assumes you’ve costed them properly in the first place because you operate a year-round price. But it doesn’t take into account any special designs you may be doing – like using longer length roses instead of cheaper varieties so you will need to look at options 2 and 3
2: You price at a lower 2x or 2.5x mark up but the volume of orders and fact they are easy to do will compensate for the difference.
3: Alternatively, you simply add in the cost price difference of the contents. So, if a flower is costing you 50p extra a stem at a peak you simply add the cost price plus VAT to your normal price. You won’t lose out but the customer gets a good value product and that’s good marketing. However again it doesn’t allow for any specials unless you always do have a luxury or low-end offering.
The choice is yours but what we would say is do not get fixated by the 3 or 3.5x rule all the time and always see what the other benefits can be. Retailing is all about the year-round results, not just what happens on one day so whilst it is a hugely important to get the margin right, sometimes tweaking it can pay big dividends in other ways.
1: Gross Margin (Profit) explained
Put simply it’s your SALES less the COST OF GOODS sold (COGS/Direct Expenses) which equals your GROSS PROFIT (GP – also known as Gross Margin GM). It’s the GP that has to cover all your OVERHEADS (OH) and generate enough to pay you via a NET PROFIT *1 (NP).
It seems so simple yet so many florists get it horribly wrong and either scrape through, work for a pittance or end up making losses. Why? Usually because they don’t allow enough for labour or all the associated costs which usually means the MARK UP and therefore GROSS MARGIN are too low.
*1 This will depend on the structure of your company i.e., if Limited you may pay dividends rather than salary but on this you MUST talk to an accountant.
Free downloads to help
We can’t teach you accountancy in one feature … accountants don’t take five years to qualify for nothing!! …. but our brilliant downloadable Business Resource, ‘Never mind the flowers, what about the Profit’ will explain a lot.
Written by our Editor, Caroline Marshall-Foster in easy-to-understand bite size chunks, it covers everything from Margin to Make up charges, Over-stuffing to Incentives and all points in-between.
To access your downloadable copy, sign up for free to our Floristry Trade Club and start making more money instantly.
2: VAT … add it even if not registered.
We hate it when people use the fact they aren’t VAT registered to get a 20% price advantage over their fellow florists … we also think it is pretty silly.
You see, assuming you are going to be successful you will have to pay VAT one day and it will come as a very sharp shock when you do. We also wonder, given all flowers and sundries carry VAT and it’s reclaimable why you wouldn’t register, especially as these days there are easy peasy accounting systems that make VAT returns oh so simple.
However, if you are determined to remain unregistered, we would recommend you charge it anyway … just uplift all your prices by 20%. Not only will you make more money but if you put 20% of all your takings into a savings account you will build up reserves for when you do need to pay or have a nest egg for when you want to invest in the business.
3: All year-round pricing
We know it’s been a bit tricky with all the price rises but we really do think year-round pricing is sensible. Not only does it stop you having to faff with changing price labels each week and running the risk that a member of staff doesn’t remember to look but it instills confidence in your customers as well. People do notice.
Basically, you charge the same price on each line whatever the purchase price. For example, a rose would sell at £3 a stem whether you pay 50p (perfectly possible in normal times) or £2.00 at peaks.
You would need to do some research to work out your annual cost … although your wholesaler should be able to help … but while your margin may slip week to week over the year it should remain constant as what you lose of the highs will be made up on the lows.
It may not be something to do this month or next given the peaks but from April we strongly recommend you look at it, especially on your staple lines like roses, chrysanth, carnations etc.
