So what is profit?
Every limited company wants to make a profit, but what does profit mean? The important thing to remember is that profit is residual. In other words, profit is what’s left over.
Profit will increase steadily over time through; marketing, advertising, online presence, website improvement ,partnering with other businesses and of course recommendation (to name a few). If you are providing a great service or product and putting in the leg work then over time your profit will gradually increase.
There are many factors that can take control of your company’s profit, however you will be glad to know that as a business owner you are able to control some of these elements. To help understand what factors you can control we have broken them down into four areas:
- Quantity: (or volume) of the products and/or services you sell.
- Price: what you charge for the products and/or services you sell.
- Variable costs: These are element to the business that increase or decrease as your sales increase or decrease (eg. inflation can increase your overheads so you then have to start charging your customers more to keep you afloat)
- Fixed costs: This is spending that does not change at least not on a day-to-day basis (eg. your employees salaries, the rent for the office)
Taking a look at these factors you can start to work out a budget and then be able to keep the business progressing at a nice steady pace, preventing those unwanted surprises.
- If you sell 100 widgets, your total variable costs will be £6000. And if you sell 50 widgets, the total variable cost is only £3000. (It varies directly with your sales volume.)
- It costs you £60, and you sell it for £100. What you sell the widget for is the price. What you pay for it is a variable cost.
- Now, if you sell a widget for £100 and it costs you £60, you’ve made a profit of £40 on each sale. We call this the gross profit or gross margin. We use this term to remind us that we still have to meet our fixed costs before we end up with a net profit.
- If you sell 100 widgets and make a gross margin on each one of £40, your total gross margin is £4000. And if your fixed costs for such things as rent, leases, wages, insurance, etc. amount to £3000, you end up with a “net profit” of £1000. On the other hand, if your fixed costs are more than £4000, you’ll incur a loss.
We hope you have found this blog post helpful. Take a look at MadeSimple for more information on how we can help your business start, run and grow.