Business Basics Program

 Profits

As we talk about business, we need to discuss profit. It is always important for businesses to make a profit. It is profit that allows businesses to grow and be healthy. You know how food helps you grow, while profit does the same for a business.

It is fine to talk about all the wonderful things businesses should do to support their communities, but this is only possible when a business is profitable. For a business to give money back to it's community it needs to make money or profit to fund community programs and many other things that businesses do to grow.  

You know all the things you would like to do someday, usually because you don't have the money to do them now. Businesses have many things they would like to do someday too, and it is profits that help them do these things. (There are exceptions such as businesses that are not profitable but earn good cash flow to fund their needs.)  

Profit is the difference between revenues or sales (money from customers)  and the costs or expenses to operate the business. Profit = Revenue  -  Expenses.  If the expenses are greater then the revenues, the business would have a loss.  If the revenues are greater then the expenses, the business would generate a profit. 

There are many rules on how to recognize costs and revenue.  Let's think of profit  in  terms of the money left over after you pay the bills. If you sold $100.00 of goods and the expenses (costs) of all the materials to make those goods and all other costs you paid during the period that you sold the goods were $75.00, then you would have earned a profit of $25.00.  Profit = $100.00 (sales) - $75.00 (expenses) = $25.00

Let's discuss a specific business and show you what profit is and how a business makes profit. 

 

Example of Profit in a Lemonade Stand Business:

To help you understand profit, let's look at a business that most kids are familiar with; a lemonade stand.

Let's consider Tyler and Hayley  who  go into business together by setting up a lemonade stand. Before they get started they decided on;

  •  a recipe for their lemonade,

  • a name for  their lemonade - "Tyler and Hayley's Sweet & Tasty Real  Lemonade",

  • amount of money required to set up the business (a budget)

  • how to borrow the needed money, whether to use savings or get investors (parents),

  • money to buy the supplies and other costs to get started,

  • supplies they will need; water, glasses, ice, lemonade ingredients, container to hold the lemonade,

  • serving table to sell the lemonade from,

  • where to locate the lemonade stand,

  •  a money box with some change,

  • marketing materials; signs, advertise when and where the stand will be open,

  • price they are going to sell the lemonade for,

  • figure out when to start serving lemonade,

  • a sales pitch that they will say to customers as customers approach their stand.

All of these decisions will impact the level of profit that the kids have in their business. Once they understand the concept of profit and they realize that they want to increase their profit; they will make some interesting decisions.

Breakeven (zero profit) Example Of A Lemonade Business: (money in equals money out)

Let's start with an example in which there is no profit, but at least a breakeven is made. Please note the changes when we show you a profit example later.

Let's assume that the;

  •  the costs to purchase all the materials for the lemonade are $7.00 
    (assume that there is no labor cost - Hayley and Tyler were not paid to make or sell the lemonade)

  • Plastic glasses  and other costs were $5.00

  • supplies for the signs and other expenses were $3.00

Therefore, the total costs are $7.00 +  $5.00 +  $3.00 = $15.00

 

If they sold 30 glasses of lemonade at 0.50 cents per glass, they would have revenues of 30 x 0.50 = $15.00 of lemonade. Now if they used up all the materials on the 30 glasses, they would have spent a total of $15.00 and received a total of $15.00 from their sales to make no money, breakeven or have a profit of $15.00(revenue) - $15.00 (costs) = $0.00 (profit)

This is OK, but they just spend their own time and didn't make any money. As a kid, it would have been a good use of time, some fun and a great learning experience. But, as business people they wanted to make money on their lemonade venture.

Loss Example Of A Lemonade Business: (money in is less then money out)

Let's assume that the;

  •  lemonade cost $7.00
    (assume that there is no labor cost - Hayley and Tyler were not paid to make or sell the lemonade)

  • plastic glasses  and other costs were $5.00

  • supplies for the signs and other expenses  were $3.00

Therefore the total costs are $7.00 +  $5.00 +  $3.00 = $15.00

 

If they sold 10 glasses of lemonade at 0.50 cents per glass, they would have revenues or sold 10 x 0.50 = $5.00 of lemonade. Now if they used up all the materials on the 10 glasses (spilled some and drank some)  they would have spent a total of $15.00 and received a total of $5.00 from their sales to make a loss of,  $5.00(revenue) - $15.00 (costs) = $10.00(loss)

This is not a good situation to be in because they now owe the $10.00 to someone. They spent more money then they took in. If they wanted to set up another lemonade stand the next day, they would not have the money to do it. They would have to work at something else to earn the money to pay it back.

You should learn some things from this money losing example;

  • sales were not high enough - didn't sell enough lemonade. There can be many reasons such as poor location of your stand (people couldn't see it, weather was not good for drinking lemonade, people may not have liked the recipe, price may have seemed high, there may have been competition around the corner...

  • may not have charged enough,

  • may have spilled to much lemonade,

  • may have drank too much instead of selling it.

Money making example (profit) of a Lemonade Business:

Let's assume that the;

  •  lemonade cost $7.00
    (assume that there is no labor cost - Hayley and Tyler were not paid to make or sell the lemonade)

  • plastic glasses  and other costs were $5.00

  • supplies for the signs and other expenses were $3.00

Therefore the total costs are $7.00 +  $5.00 +  $3.00 = $15.00

 

If they sold 30 glasses of lemonade at 0.75 cents per glass, they would have revenues or sold 30 x 0.75 = $22.50 of lemonade. Now if they used up all the materials on the 30 glasses they would have spent a total of $15.00 and received a total of $22.50 from their sales to make a profit of,  $22.50(revenue) - $15.00 (costs) = $7.50(profit)

This is a better position to be in as they now have some money to spend, save or to invest in another business venture.

Even though you made money you can still look at how well the business was run. There are always some changes you can make;

  • people may have been saying that the price was great - therefore you could probably raise the price a little (ask people what they are willing to pay),

  • you may have sold out quickly and therefore realized you could have sold more if you had it available,

  • you may have filled the glasses a little too much and had a lot of spilling,

You now realize that profit is a good thing for your business as it gives you money to use for other things. Once you pay all your bills and have money left over, you can spend it to grow your business or take it out of your business for you or people that you borrowed money from.

Now that Tyler and Hayley have shown people that they can manage a business that makes money, they are more likely to attract interest in their next business venture. Once you demonstrate that you can make money in business, people will be interested in getting involved in business with you.

Profit attracts people to a business. People would rather work for a profitable business, because the business will be in a good position to pay them.  Investors are more likely to invest money in profitable businesses that will be in a good position to pay for the use of the money from investors.