It is very dangerous to run a business and not be in a position to understand and know your profit margin. This is the reason why most small businesses deliver poor service or become bankrupt. In other cases, the business will end up supplying poor standards or making shortcuts because the budget is too small to deliver the promised goods or services.

Part of my business is cement brick production, We manufacture and sell bricks at a profit margin ranging from 20 % to 30 %, so a client may come and pay $10 000.00 , from this amount my gross profit is just $3 000.00, before I deducted indirect costs such as electricity, rentals, fuel, phone cost and stationery. In this case, it will be very wrong to treat the whole payment of $10 000.00 as my money. I should always know that the 70% is for production. Buying cement and aggregates to produce bricks.

The problems come if I may treat the whole paid amount as my profit. I may find myself buying a car, a house, or anything of my own that has nothing to do with the intended business. Automatically, this would be a disaster because I will not have enough money to deliver, either I will fail totally or deliver a substandard job.

Have you wondered why a person who has won a tender of millions will end up failing to deliver. Instead of buying equipment, the entrepreneur will buy a luxurious personal car. Go on holiday before the project is even completed. With this mindset, you will never build a successful company.

With your first significant sale, you want to buy yourself a house, a car, expensive furniture, and you will be killing yourself on the foot.

Understand your profit, and to calculate a reasonable profit margin, you need to know your cost of production. Profit is when income is greater than expenditure. This formula should never be compromised, and it’s a fact. It can not be cheated or avoided.

Once you get into business, know how to peg your profit margin. Understand it and try not to spend beyond your profit. If you want to buy yourself a big asset, do it from your dividends that only should happen when the company is making a profit. Not from working capital.

If you fail to master this aspect, then your business will never grow. It will crumble one way or the other.

The Herdboy C.E.O, Dr

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