Selling Indigenous Arts and Crafts and the Affect of Price on Profit

In above video is a Microsoft Excel example where we look at the income statement, the sales forecast sheet, and your cash flow statement. I’ll actually give you this Excel template. All you have to do is e-mail me, ask for a copy, and you can go through the same analysis that I’m going to do here for you.

On the income statement, we start off assuming an income of $6190.00. We’re going to assume you’re selling MUC Lux. Now this could be anything else.

We’re just using mukluks an example and that the price you sell each much luck for is $500. And as you can see, each month you’re also going to be selling a different amount throughout the months for a total of 62 pairs by the end of the year. It’s the 62 at $500, what’s going to create the $6190.00 in net income and that is basically money going in your pocket. Now that’s generally true if you’re the sole proprietor or the business owner or the sole director if you’ve incorporated and so you have 62 pairs at $500 that creates $31,000 in revenue. We’re taking $10,000 in selling and admin expenses. The raw materials cost you $14,400 which leaves you with the $6,190. So this is a very basic accounting report, it’s not including tax because that could be different depending on the province you’re in.

Now let’s hop over to our cash flow statement that’s at the bottom of the Excel. In the cash flow statement, you can see the receipts and that’s how much you make in sales each month. And then from each month from those sales we’re deducting the expenses.

You might have some advertising expense, a business license expense, telephone utilities, etc. Now as a business owner, even if you work from home, you can write off a small portion of some of the expenses because they’re being used to run your business. But in any case, in this analysis, you have $31,000 in total revenue across the year. From that get subtracted the expenses of running the business. Also here you are paying out $470 a month hypothetically to somebody to help create the mukluks with you.

The product you sell could be beads, artwork, anything. It doesn’t matter if it’s landscaping even, sometimes there are wages to be paid.

We’re assuming you have a supplies cost where you’re buying the beaver pelts or the tanned moose hides to make your mukluks.   What we’re seeing then on the sales forecast sheet is that you have $500 in revenue per unit sold. Now when you’re selling these, you might come into a scenario where somebody trying to negotiate with you. Sometimes half of the fun of making a purchase, for a buyer, is the negotiation. But what you need to understand is the price of what you’re selling it for already is getting things deducted against it to make that money or make that product in the first place and that’s creating for you the $6190.00 in revenue.

If you do the negotiation and they reduce the price, that’s going to have an effect on your net income. We’re assuming you’re the only business owner so net income is basically going to be the money going in your pocket. Let’s say the customer negotiates and you give a 20% discount and that puts the price at $400.00 a pair.

What is the effect on the business now that you’re negotiating and giving discounts of $100.00 a pair on your business?  By bringing the price down to $400, your net income now is minus $10.00. So basically, you’ve run a business to give away $10. All those hours of hard work, you now have minus $10 because your original price was $500, you allowed for a 20% discount. That reduced the revenue in the business, but the expenses are still going to be the same. The expenses don’t change.

The tan, moose hide, the beaver pelt, all that still cost the same. The effect is, now you have less revenue minus the same expenses creating -$10.  Sometimes I look at these scenarios from my own business and when people are asking for a better price, I’ll see something like -$10 or -$20 dollars in my own calculations and I’ll say to them, not rudely, but just to make a point, “in this scenario that you’re suggesting for a discount, I’m better off of giving you $20 and we end the transaction that way. If I don’t sell you anything, I’m better off.”

So in the hypothetical scenario in the above video, you’re better off telling the person, if I give you $5 and we don’t even do a transaction, if I just give you $5 as a gift, I’m better off because giving you this discount is creating a net $10 loss at the end of the year for me.  This is what you have when you sometimes give discounts, especially if you already have a price set so competitively (low) that you want to get the sale.