When you embark on your business or weigh options to help you set up one, there’s one question that will more often than not cross your mind as you ponder about finances, cost and profit.
In business, cost is the resources, in this case, money, time, labour etc. that you invest in your venture in order to provide a good or service for sale.
Profit, on the other hand, is the surplus amount that is accrued from a business after selling your goods/services and subtracting the cost.
When you start business initially, you never know everything and even after spending time running it, you will always find that you’ll learn new things daily.
One thing that most people don’t learn or know when they start a business is that in order to run a business successfully is that you need to focus more on minimizing costs than on increasing your profits. Let me break it down.
The Sales Obsessed Trader
If we have business person A, and their focus is on increasing his profits each time, it is most likely that they also do have a ballooning cost. See, the thing is, in order to make more profits if that is your point of focus, then you will put more effort into producing more.
Producing more goods or services will mean you spend more time, more money and more labour. In the end, yes you are selling more, but you are really not making much. More sells more often than not give a trader the illusion that they are making more money, but this may not be the case.
The Economist Trader
If we have person B with her focus on minimizing cost, then the situation will be as follows. This person will take into account what she is spending on producing her goods or services.
This same person will then evaluate her costs and see if there is any wastage being incurred during the production. The point of focus will be to cut down this wastage and any other costs of production such as electricity bills and cost of labour.
The resultant effect of this is that the sales will remain the same, but the cost of production much less. If you do the math after this, the profits will have increased for person B and this change will be much more significant in the long run.
The conclusion here is that focusing your attention on reducing your cost of operation in business is more effective in increasing your profits. Increase in sales can cloud your judgment. The backbone of all these, however, is good accounting practices.
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