new business module

20
BUSINESS SKILLS
Typically, small businesses produce products that are already
available on the market and with limited possibilities for
product diversification, that is, there are limited possibilities
to modify the product in order to set it apart from other
similar products or to improve its marketability and justify a
higher price.
If a business cannot differentiate its product from other similar
products on the market, the prevailing market price for that
product or service sets the upper limit for the sales price. The
lower limit is set, of course, by the cost of producing the
product or service. Lowering costs is a good way to increase
the profit margin but is often difficult to do.
Running a business requires a good understanding of all the
costs entailed in producing and marketing a good or service.
Without this understanding, it is not possible to determine
whether the business activity is profitable or not.
The sales price directly affects not only the profit margin of a
product, it also strongly influences the demand for that
product, and therefore the volume of sales. Generally, the
higher the sales price, the lower the volume of sales, and vice
versa. Consequently, the level at which the sales price for a
product is set has a considerable impact on the profit
generated.
While the volume of sales depends first and foremost on
demand, it also depends on the business’s production capacity.
The latter is determined by the extent of the resources
(e.g. money, labour, time, availability of raw materials, etc.) the
entrepreneur can put into the business. Entrepreneurs
have to know their production capacity and the factors
determining it; this will, inter alia, allow them to assess how
easy it would be to increase capacity if their goods or services
prove successful.