Improving Profits

As we had just seen in story #1, the amounts that did not change with the decision are irrelevant and can be omitted. Let's illustrate that point further with Story #2.

Story #2: Adding Menu Items to a Bakery

Let's assume that you own a bakery that has excellent breads, pastries, and specialty cakes. For the past eight years sales have not been "rising" and your profit is slipping. Your industry magazine has been featuring articles on bakery cafes. Until now you have not sold soups, salads, sandwiches or beverages. The magazine articles have you thinking about adding these items in order to restore some of the vanishing profits.

Your decision is:
     (a) keep your bakery as it is, or,
     (b) add soups, salads, sandwiches, and beverages to your existing business.

The relevant numbers are:

• Current and future numbers that will change if soups, salads, sandwiches, and beverages are added. (Examples include the additional sales and the additional expenses—such as ingredients for the soups, meats and vegetables for sandwiches, beverages, paper goods, a sales clerk at lunch, depreciation on any remodeling and/or furnishings, etc.)

The irrelevant numbers are:

• All past numbers.
• Numbers that will remain unchanged after soups, salads, sandwiches, and beverages are added. (Examples might be the rent, salaries and fringes of bakers, depreciation, membership dues, etc.)

Listing only the items and amounts that would change, the analysis might look like this:

Your Bakery Co. Projected Additional Revenues & Expenses For the Next Year Additional sales of existing products (breads, pastries, and cakes) due to increased store traffic $ 10,000 Additional sales of new products (soups, salads, sandwiches, and beverages) + 20,000 Total additional sales 30,000 Additional expenses including cost of goods sold – 17,000 Additional net income before income taxes $ 13,000

Since these are current or future items and the only amounts that will change, these are the relevant amounts. However, it is imperative that you remember that these are projections. If these projections become a reality, your business would see its net income before taxes increase by $13,000. If the sales are not achieved or costs are not controlled, the net income amount could be significantly lower... perhaps a negative amount.

Prior to making these projections you should have done some research with present customers. In addition you should call on companies to see if they have any interest in: the new expanded menu, purchasing boxed lunches on your artisan breads for business lunches, or ordering pastry and fruit platters for other meetings, etc. The projections should be realistic and achievable.

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