Understanding Sales Mix

What is Sales Mix?

Sales Mix refers to the concept that the profit on each of your products (or services) is different and that your overall profit will vary depending on how many of each you sell. If financial projections are based on an average gross margin and fixed cost analysis, the actual results may deviate significantly from the projections if discrepancies arise between the actual sales mix and the mix assumed in the initial analysis.

Predicting Sales Mix

When you prepare a financial projection, you should look at your historical sales mix. How many of each product have you historically sold? What were the factors in place that drove those sales? You should look at things like weather or outside influences such as available rebates or marketing trends. Ask yourself if those conditions will continue. If not, attempt to determine how the change in those conditions will affect future sales.

If you sold more of a certain product because the manufacturer was offering a rebate or special financing and that rebate or financing is now gone, can you determine how many of those historical sales were the direct result of the rebate or financing?

Are you planning to introduce new products in the projection period, incorporate how many of those products you anticipate selling during the projection period. Have you discontinued any products? Be sure to remove them from your historical analysis as they will have no impact on future sales.

The Role of Sales Mix on Financial Projections

Sales mix can be skewed if the balance between products sold is off. A skewed sales mix can wreak havoc on your financial projections and break-even point calculation because some products or services you sell are more profitable than others.

If, for example, your variable costs are twice as high on Service A than they are on Service B, your actual profit will be way different than your planned profit if you sell more of Service A and less of Service B than you had anticipated. Service A will still be contributing gross profit toward the payment of fixed expenses (assuming you priced your services correctly), but there is a risk that it may not be enough to result in a positive net profit. This is often how companies lose money. They commit to a set of fixed expenses based on a certain sales mix that their actual sales may not produce enough gross margin to cover.

If you used a tool such as a well-constructed spreadsheet to calculate your gross margin, you could quickly see the effect of minor changes to sales mix by adjusting some or all the inputs. What if you find out that a certain service is negatively affecting your gross profit? Would it make sense to sell less of that service? You can figure that out by adjusting the total projected sales of that service. We have a sample sales projection tool available for download in the Premium Member Content section of our website.

Determining the Effect of Sales Mix on Gross Profit

Once you have sketched out how many of each product (or service) you anticipate selling, multiply the price of each product by how much you plan to sell. This will give you total sales by product. Apply your gross profit percentage by product to each sales total by product to calculate your total gross profit. For more information on determining your gross profit by product, see our article on understanding cost behaviors. This will give you a picture of the gross profit available to spend on overhead costs.

Conclusion

After you have analyzed the variable and fixed costs of each product or service, the next step is to understand how the sales of each affect the overall financial results of the company. See our articles on budgeting in our membership section for more information.

The understanding of variable costs, fixed costs, and sales mix, are all building blocks to building solid financial projections.