Once we have acquired the discipline to manage our personal finances, we can replicate that discipline to our business finances.
Let’s use a painfully simple example. Your business is to buy and sell juices.
Let’s say you buy one juice at R30, and sell it at say R50. So you make a profit of R20 per juice.
Does this mean you are running a profitable business?
No.
| Juice | R |
| Selling Price | R 50.00 |
| Cost Price | R 30.00 |
| Gross Profit | R 20.00 |
Yes it is great to have a profit of R20 per juice, but is it enough?
The mistake that entrepreneurs make is to mistake a profitable product for a profitable business.
Having a profitable product, is not the same as having a profitable business.
What is a profitable business?
Let’s say you have the following fixed operating costs in order to run your business per month:
| Fixed Operating Costs | R |
| Salaries | R 15,000 |
| Rent | R 5,000 |
| Insurance | R 1,500 |
| Marketing | R 500 |
| Total | R 22,000 |
So what will it take for the business to be a profitable business?
If the business is profitable, you are wearing diamonds [You are doing very well, your finances are looking good]
If the business is not profitable, you are digging for diamonds. [You are sweating, working very hard]
How many juices should the business sell before it is profitable? [Meaning how many R30 profits/per units do we need to cover all the business expenses?]
Let’s say we sell 500 juices in a month? Is this amount enough to cover all our business expenses?
| When selling 500 juices | ||
| Juice | R | 500 units
[R x Units] |
| Selling Price | R 50.00 | R 25,000 |
| Cost Price | R 30.00 | R 15,000 |
| Gross Profit | R 20.00 | R 10,000 |
| Fixed Operating Costs | R | |
| Salaries | R 15,000 | |
| Rent | R 5,000 | |
| Insurance | R 1,500 | |
| Marketing | R 500 | |
| Total Expenses | R 22,000 | |
| Loss | – R 12,000 | |
Selling 500 juices per month does not cover all the business expenses.
Yes the product is profitable at R20 per juice, but the business is not profitable because at 500 juices, we make a loss of R12,000.
AT 500 juices, you are digging for diamonds.
What happens when we decide to sell 1100 juices?
| When selling 1100 juices | ||
| Juice | R | 1100 units
[R x Units] |
| Selling Price | R 50.00 | R 55,000 |
| Cost Price | R 30.00 | R 33,000 |
| Gross Profit | R 20.00 | R 22,000 |
| Fixed Operating Costs | R | |
| Salaries | R 15,000 | |
| Rent | R 5,000 | |
| Insurance | R 1,500 | |
| Marketing | R 500 | |
| Total | R 22,000 | |
| Profit/Loss | – | |
When we sell 1100 juices we break even. Business covers all the expenses for the month.
Unfortunately a lot of business suffer financially because they don’t know their break-even and as a result, the owners are busy selling juices [500 units] but are frustrated when the business is not making unaware that they are not selling enough to cover the total operating costs of the business.
Knowing the difference between a profitable product and a profitable business and understanding the break-even target for your business will help you better managed your finances.
What if we set our target to sell 2000 juices per month?
| When selling 2000 juices per month | ||
| Juice | R | 2000 units
[R x Units] |
| Selling Price | R 50.00 | R 100,000 |
| Cost Price | R 30.00 | R 60,000 |
| Gross Profit | R 20.00 | R 40,000 |
| Fixed Operating Costs | R | |
| Salaries | R 15,000 | |
| Rent | R 5,000 | |
| Insurance | R 1,500 | |
| Marketing | R 500 | |
| Total | R 22,000 | |
| Profit/Loss | R 18,000 | |
When we set a target of selling 2000 per month, we make a profit of R18,000 for that month. We are really wearing diamonds at this rate.
It is important to understand what amount of juices should we sell in order for us to be profitable.
Understanding a break-even point for your business is a scoreboard that informs you if you are winning or losing this finance game.
