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Every
business runs on the same formula:
Revenue –
Expenses
= Profit. From a lemonade stand
to Microsoft, the principle is the same.
For-profit
businesses
sell a
product
or offer a service
that the public wants or needs.
Profits from a for-profit organization are distributed to
its owners and investors.
Not-for-profit
businesses are focused on public service,
education or charity. Profits from a
not-for-profit business are put back into the
organization. Whether for-profit or not-for-profit,
all businesses need profits in order to survive and
thrive.
Products are what a company makes and sells.
Products can be food, clothing, cars, or anything
that you can buy.
 Service
companies do something
rather than make
something. People
who provide services are doctors, lawyers, beauticians, restaurant
workers, maids, etc.
When people say our country has a
service
economy
rather than a manufacturing
economy,
they mean most people work in service jobs.
Let’s
say we decide to start a business.
Our new venture will be making and selling homemade ice
cream.
As
new business owners, we’ll
join 25 million other Americans who own a small business
with fewer than 100 employees.
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Sadly,
over 50% of all new small businesses fail in the first year;
and even worse, over 95% fail in the first five years.
We know this is going to be tough, but we're determined to
succeed!
We
have to spend a lot of money to
start our ice cream
business.  We
need cream, sugar, chocolate, strawberries and other ingredients to
make ice cream. We need a place to work and an ice cream
maker. We need
a store.
Some
of these expenses, like the ice cream maker, are one-time start-up
expenses.
Others,
like sugar, we will have to keep paying as long as we
are in business. These are fixed
expenses.
Big
businesses have similar expenses, but on a much bigger
scale. For example, an automobile company has to buy rubber
for tires and steel for car frames, and employ thousands of
people from engineers to assemblers.
The
Small
Business Administration
(SBA) and the  Farmers
Home Administration
(FmHA) are two federal agencies
that help small businesses get started. The SBA backs up or
guarantees loans from credit unions and banks.
The FmHA provides loans to farmers and others who are unable
to get financing elsewhere.
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To get a loan from a credit union or bank, we need to write up a business
plan.
 Our
business plan outlines our fixed and start-up expenses and
anticipated revenue. Revenue
is the amount of money we’ll get by selling ice cream
cones.
Our monthly plan looks like this:
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Monthly Revenue
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$9,000
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6000 cones/month @ $.35
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$2,100 |
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Rent at Mall |
$3,000 |
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Utilities
(electricity, sewer, etc.) |
$350 |
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Insurance |
$100 |
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Loan Payment |
$250 |
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Advertising |
$300 |
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Total Expenses ($6,100) |
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Profit |
$2,900 |
Profit
is figured by looking at revenue minus expenses.
In this example, we have revenue of $9,000 - $6,100
expenses for profit of $2,900.
 The
credit union rejects our first plan because expenses are too
high. They also don’t think we can sell 200 cones a day at
$1.50 each, especially in winter. They don’t think we can
live on a salary of only $1,450 a month for the two of us.
There
are only three ways to improve our business plan.
Since profit equals revenue minus expenses, a
business can:
 We
decide to save money by remodeling an old gas station and
selling from there, instead of the mall. That’ll save us
$2,000 each month on rent, utilities and insurance. We decide to raise the price of cones
from $1.50 to $2, but anticipate sales of only 150 cones per
day.
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Monthly Revenue |
$9,000 |
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4500 cones/month @ $.35
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$1,575 |
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Rent at
garage |
$1,000 |
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Utilities
(electricity, sewer, etc.) |
$175 |
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Insurance |
$70 |
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Loan Payment |
$250 |
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Advertising |
$300 |
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Total Expenses ($3,370) |
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Profit |
$5,630 |
Profit
is now $9,000 - $3,370 or $5,630 per month.
This new plan is accepted, so we get a loan.
 At
first fewer people buy cones than expected, so we show free movies to attract
customers. This is a big success and attracts more people, who keep
coming back (repeat
business).
Soon
more people and stores want to buy our delicious ice cream
by the pint, so we start a small packaging company to do
that. On our first anniversary, we give away free cones.
Every
business starts out small and has to face the problems of
making a profit to survive. Every business has to manage the
bottom line by subtracting expenses from revenue.
Consider this:
In
1977 Ben Cohen and Jerry Greenfield, friends who met in 5th
grade gym class, took a Penn State correspondence course on
how to make ice cream. They had $8,000 between them, and
borrowed another $4,000 to start their business in a
renovated gas station in Burlington, Vermont. They attracted
customers by showing free outdoor movies on the side of the
garage wall.
Twenty-five
years later, Ben and Jerry’s Homemade Ice Cream had
$247,043,000 in sales.
The company is known for generous employee benefits,
including three free pints of ice cream every day.
It gives 7.5% of its profits to charity, and still
offers free ice cream cones on its anniversary.
For
more information on the principles of business, check out
the
Small Business Administration site.
See what you learned. |
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