new business module

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92 BUSINESS SKILLS Session 3: Calculating profit 3.1 What is profit? Once entrepreneurs have estimated their income and calculated their respective total costs, they can calculate profit and the profit margins of their products. Remember that profit is calculated by subtracting total costs from income. • Total income – direct costs – indirect costs – depreciation = profit A business’s income must exceed its total costs to generate a profit. A profit-maximizing business must closely monitor its costs and try to keep them as low as possible. Lowering cost is the most straightforward way to increase profit. You can lower costs by, for example: • turning off lights and water when you do not need them; • handling your equipment with care and maintaining and cleaning it to prevent breakdown; • trying to work as fast as possible without compromising product quality; • optimizing your workplace layout (e.g. store your inputs closer to where you produce, see that everybody has enough space to work so that they are efficient); • looking out for suppliers with the most competitive prices for the materials you need; • optimizing the size of your orders for material and trying to get rebates for large orders; • not buying too much material ahead of time and/or reducing spoilage of materials and products; • checking whether it is cheaper to rent equipment instead of owning it; • if you employ people that do not have work all the time, hiring them by the hour. Note that there is often a trade-off between the price and the quality of materials and equipment. Always make sure that the materials and equipment you acquire are of sufficient quality to produce the required quality of products.
ESTIMATING INCOME, COST AND PROFIT 93 3.2 Calculating profit –the case study continued The case study of Berthe’s small business is continued to provide an example of how profit can be estimated. Berthe’s tearoom – a case study, part 3 (see Hand-out 36) After having estimated her monthly and annual income and her total costs, Berthe was now ready to determine whether her business would generate a profit. Because Berthe knew that a starting business is vulnerable and requires close monitoring, she decided to calculate her annual and her monthly profits. This way she would be able to monitor on a monthly basis whether her business was performing according to plan. To do this, Berthe decided to spread the indirect costs and depreciation evenly across the 11 months per year her business would be open. She prepared the following form to determine her monthly and annual profit: Income Direct costs Indirect costs Depreciation Profit Month 1 2 3 4 5 6 7 8 9 10 11 12 Total The following box shows one way of calculating Berthe’s monthly and annual profit. Berthe decided to spread the indirect costs and the depreciation evenly over the eleven months she is open. She could also have spread them according to the estimated sales in each month or she could have spread them over 12 months and accepted a loss in November, since she generates no income during that month. The important thing is to take a conscious decision and to be aware of all costs.
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BUSINESS SKILLS TRAINING COURSE FOR
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BUSINESS SKILLS TRAINING COURSE FOR
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4 BUSINESS SKILLS MODULE 5: ESTIMAT
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6 BUSINESS SKILLS It is important t
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8 BUSINESS SKILLS They make the cou
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Monluck Sidara/ICRC
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12 BUSINESS SKILLS Module 1 starts
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14 BUSINESS SKILLS (d) Trading busi
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16 BUSINESS SKILLS The main duty of
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18 BUSINESS SKILLS must be able to
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20 BUSINESS SKILLS Typically, small
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26 BUSINESS SKILLS Session 3: Plann
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28 BUSINESS SKILLS 6 Typical questi
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30 BUSINESS SKILLS NOTE: Hand-out 4
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MODULE 2: DEFINING AND ASSESSING A
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DEFINING AND ASSESSING A BUSINESS I
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