Amount of rent

[HB2SF]

What percentage of gross profit do you pay out for rent? Does 58% seem high?

[Dave]

58% WOW!!!

Yes, that seems extremely high. I've always heard a guideline of around 10-12% of gross revenues for rent expense.

There are several threads related to this subject to search out.

I've always considered rent to be related to advertising expenses. If you have a really high profile location you shouldn't need to advertise as much since you have the high visibility working for you.

The range I've heard for advertising expenses is anywhere from 4-10% of gross revenues. Therefore your combined rent and advertising expenses theoretically shouldn't normally exceed a combined percentage of 20% of gross revenues on the extremely high end. Of course there are exceptions to all scenarios...if your COGS is only 20% you can have a business model that is an aberration and still be quite profitable.

Dave Makielski

[JFeig]

Most business models have rent budgets of less than 10% plus utilities.

What is the balance of your budget for:

cost of materials
labor
fixed operating expenses
variable operating costs
profit

[Cliff Wilson]

Guys, take note, the question was % of Gross Profit! Your answers were of course correct.

HB2SF, Gross profit has so many other factors in it, that it usually isn't used as the comparative.

As Dave and Jerome pointed out, Gross Revenues is most often used as the denominator and the 10 - 12% is a common number.

[Jerry Ervin]

At 58% of gross profit, the landlord would be making more money than you.

Just something to think about.

Having said that, just for the sake of argument it depends on the numbers. Let us say that the 'gross profit' of the business is 2 Million dollars. That would give you 840,000 after rent. You can still carve a good income out of that amount. If however, the 'gross profit' is 100k and you are paying expenses out of the remaining 42k, that would make for a non-existent or extremely lean income.

[Jay H]

I don't understand questions like these.

To have a specific number like 58% then you are already open and thats what your spending on rent. If so then don't you already know if thats too much or not?

One other possibility is that you are inventing some "business plan" and while cramming meaningless numbers in equally meaningless catagories, you came up with this percentage. So if your looking at a new space, how do you know what your "profit" is going to be?

Or just maybe its something else and so I'll zipit.

[Cliff Wilson]

Jerry,

Isn't Gross_Profit = Gross_Revenue - Expense?
Isn't Rent an Expense?
So, What does rent at 58% of Gross_Profit mean? Was it included in the expenses? not? huh?

[Cliff Wilson]

Jay, I usually assume they are either writing a business plan for the first time in preparation for starting or buying a business (and don't have the business background) or are not doing as well as they think they "should" and are looking for the culprit.

[Dave]

Good observation, Cliff. Maybe HB2SF meant gross profit before rent expense.

If so, and you are experiencing a gross profit of 68% of revenues before rent expense that would leave a 10% net profit which may be acceptable depending on gross revenues.


Dave Makielski

[Jerry Ervin]

Cliff

My accountant considers 'gross profit' to be gross sales minus Cost of Goods. At that point, expenses have not been calculated.

When you minus out all expenses, he then calls it 'Adjusted Gross Profit' or 'NIBT'.

I took some general accounting classes at a community college, he went to a four year college. I never argue with him.

I was really hoping that I was on the same page in terminology. If we are talking 58% of gross sales then someone needs to quickly get a part time job so they can pay the rent.

[Dave]

I think we are doing voodoo math without more information.

Dave Makielski

[Cliff Wilson]

"I think we are doing voodoo math without more information."

I agree!

"'gross profit' to be gross sales minus Cost of Goods"

Hmmm, never heard it applied that way? I did take some accounting for my MBA, but it was clearly a "side study," so I could be miss remembering. (of course the fact that it was 30 years ago and I'm getting old has nothing to do with it!)

Interesting how we must clearly define even the most basic terms before we can have a conversation that doesn't sound like Abbott and Costello?

[Jerry Ervin]

Who's on first?

[Dave]

I miss remembering too, Cliff. Don't think you're the only old **** here.

I believe Jerry is correct.

Gross profit is gross revenues - COGS before fixed and variable expenses.

I took enough accounting in college to be dangerous.

Dave Makielski

[Cliff Wilson]

Yes, yes, ahhh "miss remembering" I wonder if she really was as good as I remember?

[Dave]

Better, Cliff.

Dave Makielski

[Bob Carter]

Hey Cliff-Start at th etop of your Statement of Income

Top line Gross Sales (Revenue or whatever)

Next line might be any added revenues like Interest Earned, etc

From that Total you might subtract Freight Charges and probably Returns/Allowances

The next line you might subtract Purchases/Cost of Goods

That total is generally referred to as Gross Profit and is typically listed as a dollar amount and a PCT of Gross Sales

Then you typically list all the commonly tracked expenses

Now, I haven't been around near as many Statements as most on the Grumble and have only been involved in a limited number of ventures, but must say I havenever seen Rent expressed as a % of Gross Profit

I'mmm going to have to think why that might be a benchmark worth knowing

[David N Waldmann]

Our P&L is set up to show that Gross Profit is what's left after Cost Of Goods Sold. However, I do agree that comparing any overhead item such as rent should be to Gross Revenue, not Gross Profit. The percentages would tend to get exaggerated comparing it to a smaller number.

FWIW, our "rent" (mortgage, taxes and insurance) is just under 10% of Gross Profit (note: this is not a retail storefront location....).

[CAframer]

To me the original question sounds like one of those "OMG" realizations ... "gee if I sell this much and I only make this much then OMG most of it (58%) is swallowed up by rent! Can this be right? What's 'normal'?"

If there is a more scientific basis to the question perhaps HB2SF could elucidate.

[HB2SF]

Sorry guys for not being more specific.
Jay H.
Yes, I am looking at buying an existing business so I have access to the financial statements.

On tax form 1120S Gross Profit = Gross Receipts or Sales - COGS.

So I took Rent Paid (line 11) and divided by Gross Profit (line 3)= 54% (sorry a little of on my 58%)

[Cliff Wilson]

OK, so I run this Quickbooks reprot that I run EVERY day and right there at the top Gross-Sales - COGs is Gross-Profit, ahhh doh, (slaps his head)

Anyway, my rent appears to be 27.27% of Gross Profit. I have NO idea if that means anything?? I do know, that as a percent of Gross Revenue It's bad! My COGs being about 22.5% last year. (You can do the math, but I NEED to get my revenue up!)

[Jay H]

I'm not a business school graduate so nothing I say matters......on second thought that would apply to any topic.

Anyway with those numbers why not just use your gut. What was left? Can you live with it? Would moving that business help or hurt? I could be totally wrong but I don't think there is any amount of percentages or math that will answer any of those questions.

If the profit was a mil a year, what roll did location play in building that kind of sales?

If profit was $10,000 then it sounds like to me the rent could be offset big time by a better manager?

[Cliff Wilson]

Jay, great point! reminds me of the M's ads --- 50% off what?

[Dave]

Probably not a factor, but one to consider...are they on a cash or accrual basis of accounting? If they are a cash accounting method and were behind in the rent and caught it up in the year you looked at it would inflate that number and vice versa.

Dave Makielski

[Dancinbaer]

Originally posted by Dave:

I've always considered rent to be related to advertising expenses. If you have a really high profile location you shouldn't need to advertise as much since you have the high visibility working for you.

The range I've heard for advertising expenses is anywhere from 4-10% of gross revenues. Therefore your combined rent and advertising expenses theoretically shouldn't normally exceed a combined percentage of 20% of gross revenues on the extremely high end............

Dave Makielski Close Dave, my son sells radio advertising. He explained to me the formula for budgeting advertising is 10% of Projected Gross Sales minus Rent.

[Jay H]

This is not directed to you or your son at all Denny.

I think getting advertising percentage advice from a advertisement salesperson is like having granny diagnose that growth on your arm.

[Jerry Ervin]

Or asking a used car salesman what kind of car you should buy.

[Richard Darling]

Or asking a framer which looks better, that moulding for $5/foot, or that other one for $28.75/foot.