9) MANAGING FOR PROFIT

How many business owners do you think know which one of their merchandise lines, menu items, or products contribute most to profitability? How many do you think know how much business they have to do to offset the cost of a new freezer?

And how many know how much sales are needed to cover an employee's pay raise, a vendor's increase, or a rent hike? The answer to all these questions is, "few." Yet, profit is the motive, the objective, and the reward. The worker is motivated to become a boss by the lure of a profit.

When business-people do their jobs well, they are rewarded with profit. Why then do so many small businesses act as if profit were only something left over after everything else is done? Most business people buy, sell, handle, and record, then they hope at the end of the year, when all of these transactions are completed, something will be left over for them.

Profit should be the first item in the action plan, not the last It is possible to set a specific realistic goal and to design a workable plan that will come close to achieving that objective. Every business person who expresses the desire for more profits should pre-budget to profit. Profit planning, like many other activities in life, seems a great deal more difficult than it really is.

To effectively pre-plan profit, small business people must first be able to determine their break-even point. In its simplest form, an analysis of a break-even point will tell how much business must be done to cross the line from losses to profit. It will tell how much profit can be expected from each dollar of sales beyond the break-even point. A break-even analysis is the determination of the relationship between revenue, profit and both fixed and variable costs.

Fixed costs are theoretically unalterable, no matter what increases or decreases in sales occur during the recorded fiscal period. Rent is the perfect example. Regardless of whether sales rise or fall, rent remains the same.

Those costs that fluctuate in a direct relation to sales are variable costs. Purchases are an example off true variable cost, fluctuating as sales change.

Many costs are not consistently either fixed or variable. These items must be broken down to determine the exact proportion of the cost that is assignable to the fixed or variable list. As an example, direct labor in many small companies does not alter in direct relationship to sales.

It may not be possible to reduce the payroll by 20 percent if there is a 20 percent decline in customer count. An individual analysis of the working tasks and payroll history will determine exactly what does happen to the payroll when sales increase or decrease.

Once all of the costs are assigned to the fixed or variable category, simple mathematical formulas can determine the break-even point and the point of diminishing return.

With this information, business owners will now understand exactly what happens to their profit when they give a deserving employee a $ 10 per week raise.

If the company's total variable costs represent 70 percent of sales, a $ 10 per week increase in fixed expenses would require a $1,733.00 increase in sales to again break even. This is because $ 10 per week times 52 weeks = $520.00. Five hundred and twenty is 30 percent of $1,733.00.

Again, a $10 per week increase in fixed expenses adds up to $520 per year. If variable costs equal 70% of sales, that increased expense would require a $1,733.00 increase in sales because $520 is 30% of $1,733.00.

The knowledge of the $1,733.00 figure makes it possible for business owners to decide whether to permit fixed expenses to increase $ 10 per week, for if they do only $1,633 more business as a result of the $ 10 per week increase, they will operate at a point of diminishing return - doing more business and making less profit.