Hi Friends,
You don't have to be a genius or a rocket scientist to make it at business. And you don't need to have an MBA either - you just need to know your bottom-line facts like how to estimate profit, control costs, and so on!
That's the purpose of this blog and this new series - "The Profit Equation", which will be a series of lessons teaching people already in business or about to venture into it, the basics of how to make a profit.
Let's go!
Origins
Basically...
Profit (Z) = Total Sales (S) - Total Production Costs (TPC) - Total Non Production Costs (TNPC)
Sales = the total sales of your product
Total Production Costs (t) = Material Costs (t) + Labor Costs (t) + Machine Costs (t)
The (t) implies that all these costs are a function of time i.e. they increase with increasing production time and decrease with decreasing production time.
In other words, TPC(t), or TPC is a function of time.
Unlike TPC however, TNPC is fixed and not a function of time. These are costs that you cannot change, and must incur during every supply cycle for your product. A good example is transport costs.
All things being equal, profit Z is a function of time. i.e. Z(t), and for a production process with fixed production time T (like a day, or a week or a month), Z(t) --> Z(T).
The function Z(T) is called the profit equation, and varies from business to business, depending on the business model.
You have to know your profit equation! Knowledge of the profit equation for your business means that you are in control of your costs and your profits!
"He who knows his profit equation is in control of his profits."
The Nature of the Profit Equation
The profit equation for any business is a
straight line. In other words, Z(T) is a straight line.
At this point, you have to recall some basic high school math! LOL! No kidding...but don't worry, I'll spare you all the boring details and get down to it:
Z(T) = (dZ/dT). T - TNPC
Where Z(T) = profit as a function of TOTAL production time
dZ/dT = slope of the equation; really the rate at which profit changes with increasing production time. dZ/dT is measured in profit dollars per production hours
T = total production time, of course; and
TNPC = total non production costs.
Let's see all this on a graph!
Nice graph eh? thanks!
Anyway, as you can clearly see from the graph, how much your profit increases is a function of these three things in increasing order:
1.
TNPC - if your total non production costs are too high, it may stall your profits even if your business model is airtight.
2.
Time - the more time you spend on production, the more you produce, and the more your profit (demand willing)
3.
The profit factor - this is the most important factor in profit-making. It is a function of the number of workers (n) and unit production time (tu).
Next week, we'll talk about how to optimize your profit factor and rake in more profits!
Hope you learned something? And for those of you who thought profit was just simple arithmetic -- hope you can now see there's a lot more to making a profit than meets the eyes?
Anyway, follow me
@MontyDimkpa for more interesting biz facts! Follow me on twitter and send all your questions!
Watch the YouTube tutorial
http://youtu.be/zjDJrLiUU0Y
