The Four Pillars in a Business
Alright! you have decided to start a business so what now?
As a manager, you have many demanding jobs to do. First of all, you have to provide the business with a sufficient gross profit to pay for the general cost.
To do that, you must understand the pieces in the puzzle shown above and how they interact. Three illustrates the elements needed and, the last one, calculates your sales price including the gross profit, for your product or service. The gross profit governs your business' success.
Gross profit pays for outlays in a business and is part of the revenue. You will need a figure for your sale before you can evaluate your costs.
Start-ups use lots of time quantifying outlays before establishing the sale. In this way, expenses dictate what size of income is required to run the business. An outlay is an underling to income because gross profit derives from the revenue, and gross profit pays the bills.
A new Start-up business has no employee(s) and, therefore, has no wages.
It is a wrong assumption because
A proprietor is the first employee and is eligible for the minimum wages, including all allowances and benefits.
More information about this is available under the issue of wages.
The calculation of sales prices in many small businesses is a weak point. They do not add all the cost when calculating a sales price. Incidentals for a product or service is not part of the price calculation. Like the water in a bucket, with a small hole in the bottom, it runs out slowly. The same happens to the Gross-profit in many small businesses.
More information available under the is topic itself.
The motivation to be a self-employed person is for many job-security, excellent pay and being their boss. There are many success histories in the business world from small independent businesses, but the business world is dynamic and good music today can be lousy music tomorrow.
Creating a profit for a business is done by adding a percentage of the total amount of all direct Cost and is called Gross-profit or Mark-up.
The profit is calculated by adding (Cost + Wages) together and multiply this amount with the Gross Profit/Mark-up per cent. To make a sales price, Cost, Wages and the calculated profit together, is added together.
The profit amount calculated is used to pay for general expenses, not directly connected to any specific order/service/product.
It is crucial for a business' sustainability that it can provide a Net Profit so it can build up reserves towards critical periods.
Too often, the conclusion about profit is, if it's positive, then the business is in attractive shape. The real question is:
"Is the amount of profit acceptable?"
Profit from a sale is the last control instance. It only shows up after the deal has been finalised and effectuated and is now part of the invoice total and called Revenue. We all know it is the first figure in a Profit & Loss Statement. It does not provide any information about how the underlying value is.
Using revenues as a signal for a good business is wrong. Many companies are going broke because of their significant turnover. These often extended their survival on a high cash flow with too small or no real profit because of incorrect cost control.
In most cases, it brings them into an insolvent situation with even more significant losses.
Make sure you understand the relationship between the pillars. If you forget some hidden cost or wages, including your own, the profit will go down. You subsidise the product to benefit the customer.
Any small business should, every three months, take a reality check on their gross profit and compare their Profit & Loss Statement and Balance Sheet with their budget.