If you're having trouble deciding whether or not to invest in a particular location, here is an exercise that can help you see its profit potential.
In this exercise you outline what you would make in a month/quarter (based on the figures you receive from your sellee) and then subtract the costs that it would take for you to fill the machine at your current service frequency.
Do the following:
- Tally up all the gross profits, or the amount of cash that was collected during the time period that you measure. Subtract the cost of the product itself, and any applicable tax, such as CRV. These are the fixed costs.
- Then subtract the variable costs, such as gas, expired product, and whether or not they spent any money on repair. Still in the positive? If yes, then continue. We're not done yet. If no, then calculate a price that would put this equation in the positive. Often time you can raise your prices an additional 20 to 50 cents and still keep your customers happy.
- Now, calculate the cost of the machine and the installation of the machine and divide it by the profit of the machine per month. This is the "debt" that you're working to pay off. So, if it cost you $500 for the machine and $200 to install it (in labor, borrowed equipment, and extra gas), and the machine makes $100 a month, how long would it take to start actually turning a profit? If you said, 7 months, you'd be right, in a world where all of your product and cost to store and transport that product is free. Say you're extremely good with money and you manage to take home 50% of the gross profit. This means that your net profit is 50% of the gross profit. $700 for the cost of the machine and installation divided by $50/month (the net profit) means that machine will not finish paying its debt for 14 months.
If you look at your cash flow with just one machine and you don't make a profit in the long run, then you need to reassess things like the price you'll charge your customers for product, where you buy your product, and whether or not you need to make that individual location more valuable to justify the cost to service it. Then you can focus on making your valuable locations worth more and you can know to cut your locations that are not financially viable. This simple exercise will also allow you to be able to easily determine whether or not you should install a machine in the first place.