Net Profits

Folks,

By separate email I received a question on profits that I've been trying to
argue for a
while...and I think I got it out... to wit:

Yes...but about profits...they are what they are. Say you find yourself earning
10% net profit
on the sale of fabrics you design and wholesale. Now, 10% net profit may mean
you have 50%
gross profit. So say you have your first year sales of US$20,000 and the fabric
cost you
$10,000. So your gross profit is $10,000 and your cost of sales is $10,000 as
well.

With $10,000 paid to the chinese, you are also spending money on the
business...travel,
subscribing to magazine, joining industry associations, meeting with
customsbrokers, sales
agents, retailers, you visit fabric factories and study fabrics on sale by
others. You make
phone calls and work on the computer, all about fabrics. You also take some
money from the
income to cover personal expenses, and in USA accounting this is called "pay."

All this time, all the money you spend is spent doing things you love. This
money spent is
called overhead, and lets say you spend $8000 on this activity. Well then, with
$20,000 in
sales, 10,000 in cost of goods, and $8,000 in business expenses, you have
brought in
$20,000 and paid out $18,000, with $2000 left over, or 10% net profit.

So keep in mind, when you work for others, you do what they want, they pay you,
and you
use the money they pay you to go do what you want, with whatever time may be
left over
after working for someone else.

Self employed means you start the morning doing what you want to do most, and
you get
paid for using your prime hours doing what you love. This is importasnt to keep
inmind.
Working for others you sell your prime hours so you get get some money to do
what you
want on your least productive hours.

Now let's go back to the "net profit".Rarely do people working for others ever
save money. In
fact, in USA we have what is called the "negative savings rate." iIt is
something like 1.5%,
which means americans earn $100 and spend $101.50.

Working for yourself, if you have a 10% net profit, after the end of the year,
you have
company that is viable, and you've "saved" $2000.

Next, let's say you are happy with this situation, but you want not $20,000 next
year in sales,
but $40,000, with $4000 net profit.

Well, then study your situation. You have have had 5000 people look at your
fabrics, and
4500 said "no thank you, price too high" and 500 say "yes, price is right." The
tempation will
be to cut your prices to increase your sales. but as the book points out, this
is a mistake.
REcall that at the small business level you have no "economies of scale", and
recall you HAVE
made 10% net on the 500 people out of the 5000 who considered you fabrics.

Better strategy than cutting price is to find a new 5000 people to offer, and
additional 500
people to buy. Say you are in Kota Kinabalu which has about a million people and
this is
where you did your business the first year...well, you continue in KK and to
double your sales
you also sell in Kuala Lumpur which is five times the size of KK. Certainly
you'll find another
5000 people who will view your products, and 500 who will buy In KL.

So the trick here is find what works in the sense that it supports you
lifestyle, and do more of
that... forget about any price cutting stragegies, and don't worry about people
who are NOT
your customers at YOUR price...leave them for someone else.

***

Whew... I've been meaning to say something like that for A long time... does it
make sense?

John

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