Practical Business Advice
Author: Patrick Fitz-gibbon
Author: Patrick Fitz-gibbonAssessing current performance is an excellent piece of business advice because it is an integral part of running your small business. While this business advice can be taken qualitatively, or by looking an the various qualities of the business performance such as customer satisfaction, assessing the performance of your business quantitatively, or by the numbers, is a much better method because it is objective and tangible. It is easy to understand that red pencils, for example, are not selling and to know the expense of the outlay to purchase those red pencils, but it really does go deeper than that.
Initial Outlay The initial outlay is the actual cost of the item or service required to start. This measure can be looked at singularly, as in the case of the red pencil, or at the business level as in the cost of offering a new product or service. Take for instance a restaurant that would like to start selling pizzas. The initial outlay would involve the cost of the equipment needed to make the pizza (such as a pizza oven, a dough mixer, a pastry board, a pizza shift, pizza cutters, etc.), the cost of the equipment to serve the pizza (specialty plates, shakers for the parmesan cheese and crushed red pepper, serving blades, pizza boxes, etc.), the cost to make the pizza (purchasing flour, yeast, mozzarella, tomato sauce, toppings, etc.), and the cost to sell the pizza (the cost of changing the menu, the cost of advertising, the cost of any promotions, etc.).
Holding Costs The next cost to consider is the holding cost. The term holding cost refers to the costs involved in keeping and maintaining the equipment, the continued costs of promotion, and supply replenishment (i.e. ingredients, packaging). Holding costs also refer to the costs attributable to overhead, such as rent/lease, utilities, insurance, security, the interest that the money, if invested, would accrue, and opportunity costs. Opportunity costs involve the cost of reduced responsiveness to changing market requirements, slowed introduction of newer and/or improved items as that money could be used for other, more profitable purposes.
Profit Loss Analyzing profitability is essential in preventing profit loss. Taking the example of the restaurant, even if offering pizza does turn a profit over the initial outlay and the holding costs, is this profit more than what would have been received from investing the money in a savings account? Is offering pizza more profitable than offering ice cream would have been? It can be difficult to compare opportunities, particularly when there are different initial outlays, different holding costs, and/or different expected profits payable at different times. By considering the present value of estimated outlays and expected profits, opportunities can be compared evenly. You can then see what the profit loss is or put yourself in a position to make a decision based on which is the most profitable opportunity.
Gaining a better understanding of the money-side of your business will help you become a success. Consider using business/financial coaching to critically evaluate your business by the numbers. Visit www.HelpingYouHelpYourself.com for a complete help package or for more information on business training.About the Author:
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