15% Profit Margin

My boss has a tendency to 'preach'. Admittedly, he is successful and charming – definitely a negotiator that can tackle hard agreements, spout influential bull crap and yet still come out looking fresh and good. He talked to our now isolated team – 1 Art Director, 2 Designers, 1 Account Exec and 1 Editor – about the story of L*****, about how he wants us to grow, and of course about his promise of abundance and profit sharing. In the process he managed to somehow make it look like the company is not doing well at all.

His lecture today was based on calculations made on the spot that I do not feel justified. This calculation is made to compute approximately how much sales is needed to justify hiring an extra person.

Average Salary = $2000 x 12 = $24000 /annum
13th month = $2000
Costs = $500 x 12 = 6000
Leave + MC = $1000

Totaling to $33000 – add CPF to that and it's roughly $37500.

Now comes the shocker – which should not come as a surprise to those actually reading – 15% profit margin!!

Judging from that, it means that one extra head would need to raise the sales target by $250000!!

He then went on to show how the company is doing fine ($1.6 mill last year in sales), and with us 6 people ( = $1.5 mill) so its quite right there – he's earning a mere $100k. But now that one has left and another two is coming in, we will have to work harder and try to raise the bar further.

$250000 per person per annum = our compact team (lets count it at 7) will need to raise $1.75 mill in sales, amounting to $145k per month in total sales. So his proposal was that we set the benchmark at $140k, and there will be another benchmark every $20k onwards. Every extra $20k that's earned will be divided by 2 (zipper through this, not explained why) and then the profit (15% of that) will be divided equally amongst everybody. If we reach $160k for the month, we'll get $1500 divided equally. At $180k, we'll get $3000 divided equally, and on and on. Nothing is concrete of course, as he himself mentioned how this is the way it'll be done if he's "generous".

I can't help but feel a need to correct him, even in the blogosphere – even as I know with certainty that he won't care, don't care. Surprisingly, when he was talking, I actually felt myself admiring him – his style, his confidence – the marks of a successful man. And I can feel the audience – my colleagues – being captivated by his intentions, and I know for certain that they feel not what I feel, or perhaps they do so too, but those feelings of injustice and unfairness are buried deep deep down, so deep inside them it'll take a real hard slap to wake them up from slumber.

Allow me to at least try it, or at least reveal my version of the calculation.

My initial reaction when he mentioned that 15% was one of outrage and disbelief. I cannot believe that the company is charging a mere 15% profit margin to cover costs, design services, expenses and what not and still be profitable. Obviously I was wrong, as even that small profit margin is enough to cover all of the above and more – earning our director the minimum 6 figure sum yearly, with little to no effort.

Nevertheless, I was sure that the profit margin charged by my company is way more than 15% – at least double that. A quick browse through past quotations and proposals proofed my suspicion right. The company charges between 50% to 20% on design charges alone and not including markups earned from printing and the likes, our profit margin should average around 30% to 40%. For the purpose of this calculation, I think its prudent to assume the worst – 30% profit margin.

First off, I'd like to calculate the amount needed to sustain an extra person. I also felt $2000 average is a bit low, so I raised it to $2500.

Average Salary = $2500 x 12 = $30000 /annum
13th month = $2000
Costs = $500 x 12 = 6000
Leave + MC = $1000

Totaling to $39000 – add CPF to that and it's roughly $45000.

That's quite a lot more than the initial $37500, but lets proceed and calculate the sales required to necessitate having that extra employee. $45000 / 30% = $150000.

That's a stark contrast to his lecture. One employee can easily earn $2500 and yet will only need to raise the sales by $150. In fact, lets even add to that and give everybody $3000.

Average Salary = $3000 x 12 = $36000 /annum
13th month = $2000
Costs = $500 x 12 = 6000
Leave + MC = $1000

Totaling to $45000 – add CPF to that and it's roughly $50000.

$50000 / 30% = $166666 – rounding up to $170000.

Still reasonable and achievable, considering his calculation of needing $250000 per extra head.

Based on that, the company is doing exceptionally well with $1.6 mill last year. $170000 per head amounts to $1.02 mill (6 people), lets even add additional costs here and there, rounding it up to $1.1 mill. The company is in the black, by $500k! Pah! What crisis!

There is a gem of a lesson behind all this however. 15 is the magic number. I can easily imagine him justifying that 15% profit margin, because that is most probably the profit margin that he started with, when the company was brand new. As we plow through our 18th years however, that 15% is obviously no longer appropriate, and we charge a premium for our margin –  sometimes as high as 50%. This 15% profit margin would serve a good benchmark for me to gauge my design fees in the future.