In business we have what we call direct cost. This is the amount spent directly on either purchasing your stock or raw materials for production. Which actually comes on the invoice of your purchase.
There is what is called indirect costs. These are costs that come inform of rentals, phone bills, salaries, transport etc. I usually call them running costs. Mainly this is what you spend on administration of your business.
From my experience, these are dangerous expenses in a business because they can make a business to collapse if not well managed. It is spend in very small amounts but at the end of the day if you combine those few dollars you would find out that it’s actually a very big amount.
Imagine you take just a dollar for airtime, $3 for transport and $5 for airtime. These expenses eat directly from your financial gain. So understand your profit margin first so that you can automatically know the part of your financial gain in every sale.
In my business we put between 20% to 35% profit margin. So each time I look at our sales report I can easily tell what our gross profit is. If we make a sale of $1000 I know that our gross profit is between $250 to $300. This is important to know so that you can manage your expenses.
Gross profit is what you get after sales before you deduct indirect expenses. You get your gross profit by just deducting buying price from selling price.
Then to get your net profit, you will need to subtract all other expenses from your gross profit. That is transport costs, phone bills, rentals, wages and salaries, licenses fees etc.
What will remain is what we call net profit.
Net profit is what the business has as financial gain that can either be divided among the owners of the business or plaugh it back into the business.
Most people don’t understand this concept. They treat every sale as profit. If you are selling cement at $10 when purchased it at $8. And a customer buys 100 bags of cement, the customer will pay $1000.00 but this whole amount is not your financial gain. Your only gross profit is $200. But most people treat the whole paid amount as financial gain and they can freely use the whole amount for other things.
The idea and good principle of business is you to bank your money either in the bank or your secret box until it is enough rein-stock. The circle should be repeated over and over until the net profit grows. This is how your business can grow.
Becouse of the size of my business now. It has grown big such that we do a min profit and loss account on monthly basis. I receive end of day reports on daily basis. We can spend upto $20 000.00 USD value on vehicle fuel only. We have an average wage bill of about $47 000.00 Every month not including other running costs such as electricity, t & t, phone bill and other expenses.
The more the organization grows the more the responsibilities increases, but also if well managed you can enjoy a bigger percentage of your net profit.
This topic is broad we might need more 3 posts talking about this topic alone.
By B. Marambire
- Why It’s Important To Understand Your Profit Margin In Business
- Why Most Young People Fail To Breakthrough In Business
- Super Natural Power Mindset Leading Many Africans To Poverty
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