Month: November 2011 | Simple Small Business

Do You Really Need a Business Plan?

Starting a simple small business is very much like a roller-coaster ride. It has many ups and downs, twists and turns and sometimes heart pounding excitement. It is definitely thrilling and scary at the same time. In the midst of hundreds of things to do for a new start-up, one can get lost in unnecessary tasks or even lose track of the important things. In order for start-up founders not to lose their sight on important things, it is imperative to have a business plan. Even if that business plan is on a napkin or a single sheet of paper.

Business plans are like roadmaps or blueprints. They provide start-up founders with a direction, and necessary information to form correct action plans to use at different stages of the business.

Many business books and business scholars talk about why you need a business plan and how to go about creating one. The rule of thumb seems to be to ask the creator to predict the future and to create a five-year plan describing everything that will happen in detail. However, a lot of successful start-up founders today will disagree with this approach. Simply because five years is too long to create a definite and certain plan (see “How To Create a One Page Business Plan“). This approach just doesn’t take ‘uncertainty’ into consideration.

Understanding The Difference Between Profit Margin and Markup

Many people have a problem with accountants’ jargon and often get confused between the terms “profit margin” and “markup” which are often bandied about freely or used interchangeably. Although these two terms are used to express different things, they are also, in fact, two different ways of analyzing the cost and profit of a product or service in your small business .

Let’s explain in simple terms.

Say you bought an item for $50 and could sell it for $100, doubling your money.
In this case your markup would be (the difference between selling price and cost price) divided by the cost of the item and multiplied by 100 to bring it to a percentage.

ie ($100 – $50) = $50(difference). $50(difference) / $50(cost) = 1 x 100 = 100% (here “/” stands for divide)

Your markup was then 100%.

When you look at the profit margin on that sale, that would be (difference between selling price and cost price) divided by the selling price and multiplied by 100 to bring it to a percentage.

ie ($100 – $50) = $50(difference). $50(difference) / $100(selling price) = .5 x 100 = 50%