At the end of the month or end of the year, we all hope to see a profit. This only happens if we can maximize profit at on individual job or project. #000299

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Making Profit

By Gary Shotton

Hello, my name is Gary Shotton and I’m sitting here in the country of Croatia in this capital city of Zagreb. I’m delighted to be a part of a trip here to help encourage businesses. But on a weekly basis we talked to groups in developing nations and particularly East Africa. One of the questions that came up, was a situation where someone had started in a chicken farm. Raising I think eggs. But probably maybe broilers. I’m not sure, but the situation was such that after a period of time they were selling the product and they’re selling the product and they went bankrupt. They said what happened? How could this happen? Well, let me tell you that’s something that’s extremely common in start-up businesses. And I want to answer that problem or that situation to the best of my abilities, because we all could face that.

We’re working hard and at the end of a period of time there isn’t any money. Well, first of all, we have to look at every situation. We’re calling this a making profit. How do you actually make profit? And so, when we look at a profit, we usually look at a time period of one year. How much profit did we make in one year? That’s nice to know. We could look at a situation regularly. And should be looking at how much profit did we make at the end of each month. So, you know only if you were making profit in most of the months or we had good profit in some months. And you add all the months together then you could say at the end of the year you had this amount of profit.

But let’s go down further. Let’s say that we were looking at each individual job that we did. We call the term job costing, but in this sense just say making profit at the end of each job, did you make a profit? That’s going to be a challenge or a situation where you’ve got to be able to keep some records. Not a lot of records with some just basic income records and expenses records on the individual job that you’re doing. So, let’s take the chickens. Somehow these people got some chickens I don’t know how many let’s just say that there were a hundred chickens. Let’s just say those chickens cost has baby little bitty chickens two dollars each. That’s not out of line in my country. And maybe at the end of the growing season when they grew up from just babies to ready to lay eggs that would be about five months. So, let’s say at that point these chickens cost $10 each. That’s your startup cost. You see you could buy them as little bitty baby chickens, but you have to have the money to get them to the point that they’re laying eggs. So, let’s say that they’re actually at that point and they’re ten dollars per chicken. Now you have a hundred chickens. So, you can do the math there’s the amount of money you would need to have for what we call startup. That’s how you’re going to get started.

Then at that point you’re ready to run. You’re ready to go on going, ongoing, you’re going to feed the chickens. You’re going to gather the eggs. You’re going to feed and water the chickens. You are going to gather the eggs. You’re going to sell the eggs. Now you’re up and running. Now at that point you’ve got to be able to cost everything. Again, to get started let’s say you know that they’re ten dollars a chicken. But now you’re running on a regular weekly basis and you now need to count all of the costs related to those eggs. In this case most of the cost is going to be the feed. Water is not going to be very expensive. So, the feed is going to be the major cost. But you should figure in your cost of labor. Now if this is just a small operation you should have a job or doing something else, someplace else, so that you’re getting income for your household. So, you can’t put too much a burden on these just 100 chickens now to raise enough money to feed a family of 15 or something. That’s not fair. You have to have other income so that this process of investment of your chickens and your eggs can make a chance of making a profit.

You’ve got to be able to take good records at that point. And at this point you need to know hey these chickens are going to take some mixture of good food. You should have done your research so you know the best food. I know one of the foods is some fish and dried fish and some grain. And now you’re going to have to look and see how much grain, how much fish, how much ingredients are necessary on each month let’s say to raise that hundred chickens. And that’s a sum of running down to figuring out exactly what cost per egg to raise those chickens and make those eggs sellable so, our dozen eggs. So, basically each egg would cost you certain amount. I’m going to make up a figure of 20 cents. You can sell each egg for 20 cents. Now you’re going to have to ask yourself what did it cost me for that 20 cents of eggs. Did it cost me 10 cents? That’s your cost of operation. And if you’re not making your cost of operation, then you’re not going to make a profit at the end of the month, end of the year.

Why would I say just 10 cents? Well, most people do not figure their overhead. The cost of keeping things running. And my general range of thought is that in most cases your cost of direct expenses should be somewhere around fifty percent or one half of your selling price of your product or service. Because that leaves you some room for overhead the cost of things you didn’t really count on relate it to directly those growing those chickens and those eggs. And in reality, there’s probably going to be around 40% of those selling price of the eggs that covered that are just the overhead of operation. I know it may be hard to figure out to begin with, but if you’re doing certain things, you’re going to have some operational. Just buying the gasoline for your car or going to town. Those things that would be related.

Most businesses should be targeting 10% profit. All that sounds so small. Well, I’m telling it’s pretty close. Most people that say are making 40% profit, they are not making 40% profit because they’re not paying all the bills fairly out of that related to that. And so, your profit is what’s there after everything’s paid. Absolutely everything. And most of the time it’s going to be around 10%. It is a good target. And by the way if you want to grow, you’ve got to take some of that 10% in order to buy your chickens. Buy some growth chickens. Buy some more chickens and so that you’re growing all the time. That you’re always adding to your flock.

Let’s take some other products. Let’s take someone that’s making cakes. Well, to make a cake; what are the ingredients in making that cake? First of all, if you’re making cakes, you probably could start maybe in your home. So, you have very little overhead. Very little cost of getting started. The ovens in your house, the cost of operations. When you move to a new location where there’s actually a store, then you’ve got an overhead. So, while you’re in your house, that overhead is covered by your household. But when you’re out at that other location you’re going to have that cost. Again what is the cost of the flower? What is the cost of the salt? What if there is sugar? Whatever’s ingredients in there you should know the amount of cost of each individual piece of making that with let’s say a full cake. And then you look at the cost of selling that cake, the money that really comes in, and decide how much was the direct cost of that cake to make the cake.

It goes like that in everything. If you’re a tailor, like you’re making this coat; what is the cost of the labor? What is the cost of the leather? What is the cost of the thread? You need to know that individual cost of each thing. Well, it’s raining here now. So, I better wrap it up. I’m glad to be a part of this. I hope this makes sense, because the job costing of each individual part is what makes up their profit. And if you make the profit in one segment of this then you add that together and you have a hundred chickens. Great. There’s your profit. And by the way you’ve got to grow step by step. Don’t try to grow too fast. Make sure you understand your accounting and your job costing before you get larger. Well I’m here hoping this is helpful to you. We wish you the very best and we believe that you’re going to make profit with your business. Thank you.