“Ensuring That I Have a Profitable Business,” Starting and Growing My Business for Self-Reliance (2017)
“Ensuring That I Have a Profitable Business”
Learn
Maximum Time: 70 Minutes
1. Would I Want This Business?
Watch:
“Would I Want This Business?” available at srs.lds.org/videos. (No video? Read the script at the end of this section.)
Discuss:
Would you want to own this business? Why or why not?
2. Refining My Personal Business Planner
Read:
Each day you should work to improve your business. Continually evaluate it and share your progress and challenges with the group.
3. Understanding Variable Costs and Fixed Costs
Read:
“Know Your Resources; Manage Your Costs” (see the script at the end of this section)
Discuss:
What business principles did you learn from this dialogue about Antonio’s shoe repair business?
Read:
There are two principal costs in running a business: variable costs and fixed costs.
Variable Costs: The cost of some resources will vary according to how much a business produces and sells. These resources are often called the cost of goods sold. They are also called variable costs, which is the term we will use in this group. Some common examples of variable costs include the labor required to sell or produce the service or product, the materials required for the service or product, and shipping.
Fixed Costs: The cost of some resources will stay steady regardless of how much a business produces and sells. These are called fixed costs. Some common examples of fixed costs include rent, loan payments, salaries, utilities, and insurance. Business owners should be thoughtful and cautious in taking on new fixed costs.
Taxes are an additional cost imposed by government or other agencies. As a business owner you need to research and understand your tax obligations and account for them when considering the profitability of your business opportunity.
Turn to Mark Bailey’s Personal Business Planner (in the Appendix) to see what resources he needed for his business.
4. Understanding Gross Profit Margin and Net Profit Margin
Read:
Profit is the money a business keeps after the costs (often called expenses) are taken away from the sales revenue. It is calculated as follows:
There are two types of profit: gross profit and net profit. Gross profit is calculated as follows:
Net profit is calculated as follows:
It’s not enough to know only the gross profit and net profit your business is making. To know if your business is succeeding, you also need to know the profit margin. The profit margin is a percentage that you can calculate using simple math. This percentage tells you about the profitability of your business.
Gross profit margin is the percentage of money the business keeps after the variable costs are subtracted from the sales revenue. You calculate it as follows:
The gross profit margin is important because it can help you evaluate if your business is on track to being profitable.
Read:
Net profit margin is the percentage of money the business keeps after both the variable costs AND the fixed costs are subtracted from the sales revenue. You calculate it as follows:
The net profit margin is important because it tells you the percentage of money that could be reinvested in the business or returned to you as the business owner.
Read:
Most successful businesses have gross profit margins that are around 50 percent or greater and net profit margins that are around 10 percent or greater. They also operate in a market where there is high customer demand and the possibility for their business to grow.
5. Accounting for the Value of My Time
Read:
Many business owners don’t adequately account for the value of their time. Be sure to account for the labor you put into a service or product. The cost per hour is the value you place on your time (or the amount you pay other people to help you).
Discuss:
Imagine a business owner who handcrafts beautiful blankets. Although the materials for the blankets are inexpensive, every blanket takes 60 hours to make.
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If the business owner sells a blanket for 150, what is the value of the labor required to make the blanket? (150 ÷ 60 hours = 2.50 per hour)
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Is this the best use of time for the business owner, given other opportunities that might exist?
6. Price for My Service or Product
Read:
Your price must cover the costs you incur and the profits you seek, but it is not dictated by them. You can set your price based on what you think customers will pay for your service or product. The price you charge, however, is typically influenced by competitors and the quality of your service or product.
You should work to increase the quality or perceived uniqueness of your service or product. This will potentially allow you to charge a higher price than your competitors.
If the price that customers are willing to pay would not make your business sufficiently profitable, you should consider ways you can lower your costs. Some of these ways include (1) purchasing in bulk at a reduced rate and (2) using multiple suppliers to gain better prices. If you are unable to lower your costs, you may need to choose a different business opportunity.
7. Do I Have a Profitable Business?
Read:
You may have selected a business opportunity with good profit margins that appears to be profitable. However, if you selected a business opportunity that wouldn’t be profitable or wouldn’t provide enough profit to be worth the value of your time, be willing to consider other opportunities.
Additionally, does this business opportunity allow you to be self-reliant? Does it provide for you and your family and allow you to serve others? If not, be willing to consider other opportunities. Refer to the materials in chapter 2 to consider other unmet customer needs that match your interests and your ability to provide a competitive advantage.