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Taxes?!?


Mudpuppy

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I have a question regarding taxes. I was under the impression that after taxes for federal, state, and indirect taxes that you get about 41% for a 750ml bottle plus marketing etc. Is this not the case? I got confused when I read the down and dirty business plan in Bill Owens book and it said after retail you get 50% and then you have to pay the federal tax. How many time is a 750ml bottle taxed by the feds? Is it taxed at retail and also by the supplier? Please someone clear this up for me.

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Federal Excise Tax is applied once.

Some producers apply the tax to the bill of materials, and thus mark-up the tax. Speak to your accountant. The correct action is (probably) to apply the tax at the time of sale. When selling to a bonded warehouse you can probably get him to pay the tax and thus have a lower price.

In Bill's book, the tax was considered part of the cost of the product for the sake of simplicity...it has to show-up somewhere. If it had not been there, everyone would have taken the editor to task.

The spreadsheet is too simplistic, but that's life when you're trying to get top-level concepts across in a small space. The fact is that the markup from wholesale to retail is not relevant to the producer's income statement, though it is relevant to product positioning. In other words, the producer can not derive revenue from the retail price, but if he gets it wrong, he may leave money on the table, or not make money at all. So, the profit at retail is interesting, but it's not "available" to the producer.

Most retailers want about 30% markup. Grocery stores may be a bit less - 25%. Big-box stores may be as low as 10% or 15%.

Most wholesalers want 30% too, especially for lower volume products. When you're big, you may get a lower number.

So, let's say your costed-BOM for a product is about $6 without the tax of $2.16 fed and .66 California ($2.82)

Scenerio #1 - You pay the tax and consider it a cost of production:

6 + 2.82 = $8.82 (costed BOM)

8.82 x 2 = $17.64 (the books say the MFGR needs a minimum 2x profit)

17.64 / .7 = $25.20 (the wholesaler pays $17.64 and marks-up to 30% margin)

25.20 / .7 = $36 (the retailer pays $25.20 and marks-up to 30% margin) the retail price is now $36.

Note that $17.64 is 49% of $36. This is about 50% (.7 x .7 = .49)

Scenerio #2 - You pass the tax to the warehouseman under bond:

6 x 2 = $12 (this is the new wholesale price without the tax)

12 / .7 = $17.14; this is the warehouse margin, and now we add the tax of 2.82

17.14 + 2.82 = $19.96 (this is the new wholesale price to the retailer)

19.96 / .7 = $28.50 (this is the new retail price at 30% margin)

Note that $12 is 42% of $28.50 - very close to the 41% you suggested.

Thus, #1 positions his product above the pack. His "profit" appears to be $8.82, but his sales are likely lower.

In contrast, #2 makes only $6, but his product falls well within the <$30 category, so his volume may be much higher.

In some states, producers are permitted to sell directly to retailers, omitting the "middleman." In this case, it's wise to understand that while you appear to have a higher margin, you're also satisfying (doing the work of) other channel functions, so you're experiencing higher costs as well. In this case, switch hats when you sell to retailers...you can't sell to the retailer at $12 + $2.82 and "give-away" the profit you need to operate the sales and logistics part of the business.

Remember, your mileage may vary.

Will

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Federal Excise Tax is applied once.

Some producers apply the tax to the bill of materials, and thus mark-up the tax. Speak to your accountant. The correct action is (probably) to apply the tax at the time of sale. When selling to a bonded warehouse you can probably get him to pay the tax and thus have a lower price.

In Bill's book, the tax was considered part of the cost of the product for the sake of simplicity...it has to show-up somewhere. If it had not been there, everyone would have taken the editor to task.

The spreadsheet is too simplistic, but that's life when you're trying to get top-level concepts across in a small space. The fact is that the markup from wholesale to retail is not relevant to the producer's income statement, though it is relevant to product positioning. In other words, the producer can not derive revenue from the retail price, but if he gets it wrong, he may leave money on the table, or not make money at all. So, the profit at retail is interesting, but it's not "available" to the producer.

Most retailers want about 30% markup. Grocery stores may be a bit less - 25%. Big-box stores may be as low as 10% or 15%.

Most wholesalers want 30% too, especially for lower volume products. When you're big, you may get a lower number.

So, let's say your costed-BOM for a product is about $6 without the tax of $2.16 fed and .66 California ($2.82)

Scenerio #1 - You pay the tax and consider it a cost of production:

6 + 2.82 = $8.82 (costed BOM)

8.82 x 2 = $17.64 (the books say the MFGR needs a minimum 2x profit)

17.64 / .7 = $25.20 (the wholesaler pays $17.64 and marks-up to 30% margin)

25.20 / .7 = $36 (the retailer pays $25.20 and marks-up to 30% margin) the retail price is now $36.

Note that $17.64 is 49% of $36. This is about 50% (.7 x .7 = .49)

Scenerio #2 - You pass the tax to the warehouseman under bond:

6 x 2 = $12 (this is the new wholesale price without the tax)

12 / .7 = $17.14; this is the warehouse margin, and now we add the tax of 2.82

17.14 + 2.82 = $19.96 (this is the new wholesale price to the retailer)

19.96 / .7 = $28.50 (this is the new retail price at 30% margin)

Note that $12 is 42% of $28.50 - very close to the 41% you suggested.

Thus, #1 positions his product above the pack. His "profit" appears to be $8.82, but his sales are likely lower.

In contrast, #2 makes only $6, but his product falls well within the <$30 category, so his volume may be much higher.

In some states, producers are permitted to sell directly to retailers, omitting the "middleman." In this case, it's wise to understand that while you appear to have a higher margin, you're also satisfying (doing the work of) other channel functions, so you're experiencing higher costs as well. In this case, switch hats when you sell to retailers...you can't sell to the retailer at $12 + $2.82 and "give-away" the profit you need to operate the sales and logistics part of the business.

Remember, your mileage may vary.

Will

Thanks for clearing that up Will I really appreciate it.

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A good explanation, however be careful of mixing "markup" and "margin". I'm sure you know they are not the same, but non-financially astute types will go wacky trying to figure out why everyone else gets a different price when calculating their 25% margin. Unfortunately, I speak from experience.

In short: margin percentage = cost ÷ .(inverse of margin amount) ; e.g. 25%margin = $10 ÷ .75 = $13.33

markup percentage = cost x markup + cost ; e.g. 25%markup = $10 x .25 +$10 = $12.50

The common mistake is to multiply the cost x 1.25 on your calculator, thinking that's a 25% margin. It is actually a 25% markup.

Everyone you deal with will be calculating margin percentage. If you're shooting for a specific shelf price, this is rather important to realize or your shelf price will be significantly higher than you expected.

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