Which is better to accomplish in your business? A profit?
A loss? Break even? Anyone with any sense will, of course, state that making a
profit if what being in business is about.
I’m going to use an example of selling book sets to
families where you, the business owner, purchase the set of books for $200 per
set and then you sell the set of books for $400. On paper you make back your
$200 and make a $200 profit on each full sale of $400. However there are
various ways of calculating things.
Say you sell 10 sets of books per month. You must
purchase the 10 sets of books at a cost of $200 each for a monthly expense of
$2,000. If you sell all 10 sets of books for $400 each you will make $4,000
which is a profit of $2,000. If you sell all 10 sets of books for $250 each you
will make a profit of $500.
In most cases a smart business owner would ask for a
minimum down payment from the customer that is what they paid for the books for
sale. In our example today the business owner purchases a set of books for $200
from the book publisher and then they ask for $200 deposit from the person
purchasing the books. This way the business owner will break even and not lose
money and since the person purchasing the books made an investment of $200,
which is 50 percent of the purchase price, they are likely to pay the business
owner until the account is paid off rather than default on payments and have
the books taken away.
In the example above if I am a business owner and I
purchase 10 sets of books from the publisher at $200 each I spent $2,000 for
inventory. If I only get from customers $200 each as a down payment I have made
back my investment of $2,000 and I break even. Some would argue if that’s all I
end up getting from the customers then I lost $2,000 but I say no that is not
the case. Breaking even doesn’t mean you lost money. You broke even and didn’t
make a profit. There’s a huge difference.
If you purchase the book sets for $2,000 and get full
payment of $400 for each set sold you made $4,000 which means you recovered
your $2,000 outlay for inventory and you made $2,000 profits.
There are some in business who, when confronted with this
scenario, don’t want to accept that they broke even of made only 25 percent to
50 percent of what they expected to make after covering costs. You simply do
not LOSE money when you reach the break-even point and for sure you do not LOSE
money if you make even One Dollar over what you spent for inventory.
The concept is so simple that’s what makes it hard for
some people to understand.