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%
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Starting a small business can be one of the most rewarding and fulfilling things that you ever do, or it can turn into a huge nightmare if you let it. You greatly increase your chances of success by having a simple one page business plan created as your starting point.
There is an old saying that has proven itself over and over again and it is especially true in the business world. The saying goes like this “If you fail to plan, you plan to fail”. Having a simple business plan is like having a road-map, guide or cheat sheet to help you get from where you are today to where you want to be some time in the future.
If you are planning on starting a multi-national major corporation, then you will benefit from having a full-blown 20 page business plan that outlines your companies strengths, weaknesses, market opportunities, marketing strategy, mission statement, competitor’s strengths and weaknesses, etc…
However, if it’s just you or just a couple of people working together, then a one page business plan is really all you need to get you started.
This one little step can mean the difference between starting a business that never actually achieves any real level of success or starting a business that eventually becomes hugely successful.
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1. Find a Need & Fill It! (Blah, Blah, Blah!)
You have heard this a million times before, but it is the core, the root, the foundation of any business. Business is about serving people’s needs. The more people you help, the greater you are rewarded. It is not about doing what you love. Although if you can accomplish both, then that’s great. But as catchy and simple as this phrase is, unfortunately there is a little more to it.
One of the biggest problems people have when starting a business is what I call “Dedication Justification“. Justifying what they want to do by concocting some need that really does not exist for their product or service. Dedicated Hobbyists and Artists are notorious for this. For example, Let’s say you are an artist and want to start a business selling other people’s creative works as well as your own. So you convince yourself that there is a real need in your town for great art. The only reason more people in your town don’t buy art is that there is no place to purchase great art. Guess what? Chances are you are lying to yourself and you don’t even realize it.
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I have been told that I am an overly sensitive and emotional person. This is a trait in which I fully believe I inherited from my grandmother. In some cases it has been a hindrance, especially when it comes to running a simple small business. I am a people-pleaser and my feelings can be hurt very easily. However, in most cases it is that exact characteristic that helps me to genuinely care for others and have a deep desire to assist in their well-being. This has also been a key factor in the success of all of my businesses.
You are probably asking yourself right about now, “Okay, what does this have to do with running my simple small business and customer relations?” It has so much to do with what I think is the single most important thing in customer relations. Empathy. Unless you have empathy for your clients and customers, how can you even begin to offer them a product or service that meets their needs? You have to be able to put yourself in their place and connect with them emotionally to fully understand what is driving them to even consider purchasing a product or service from you.
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I own and have owned many businesses in my life. Some were failures, but many were successes. After thirty years of diligently practicing this game we call business, patterns begin to emerge. When looking back, it is easy to see what I did right and what things I did that were downright stupid. I can state without any hesitation that every successful business I wound up with were successful because eventually systems were created and implemented. Based on that, I would argue until the sun goes down that if you want your small business to really be successful you need to start creating, documenting and implementing systems.
Keep in mind I always distinguish between being self-employed and being a small business owner. Neither one is necessarily better than the other. If your desire is to keep everything simple, never hire more than one or two people and to always be the main producer or service man, then being self-employed is a much less stressful way to go. But as a small business owner, the business will take on a life of its own. Like a child it needs rules to regulate how it acts or before you know it, the spoiled child will take you down, hard! Systems are the rules for your child.
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Running to catch up, but never quite getting there.
As small business owners, we all know what it is like to lie in bed at night or get up early in the morning to add to our list of all the projects that we want or feel we need to accomplish that day. If you are an optimist you will often think, “Today is the day I get a lot of things done on my list, then I can take a day to relax”. But by the end of the day, you feel like you are further behind then when you started.
It is a common issue with small businesses owners and even CEOs of large corporations. The sad fact is, if you are running a business there will always be more than enough to do. There really is only one way to get a handle on this problem that can lead to burn out and even depression. Learn to decide every day what the one thing is you want to accomplish before the day is over. What is the one thing that will move your business just a little closer to your goal? It is a mental game that you must learn to play by yourself every morning and ask yourself the following question. “If I could only accomplish one thing today, what would it be?” (read more about focus)
Yes, it is important to keep that priority list and naturally you will continue to add to that list. But, if you only have one thing to complete, anything else that gets done is simply icing on the cake.
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For a Clue as to How to Weather the Storm, Look at Those Who Have
Almost every business feels it when the economy takes a down turn and we all hear the little voice that says, “what if ?” But taking a cue from those companies that have sailed through the Tsunamis, not just once but many times, just may hold the key to your survival.
Kimberly-Clark, Philip Morris, Walgreen’s, Kroger, Gillette, Abbot Laboratories, Wells Fargo, Pitney Bowes, Wal-Mart and Walt Disney are only a few companies that have sustained growth through good times and bad over the last fifty to more than 100 years.
- They all became and were known as the best at something.
- They all focused on hiring good people and then not micro-managing these people.
- They all had very specific goals for the company and everyone knew those goals by heart.
- They all had core values that went beyond just making money.
- Every decision that these companies made were determined by their goals and their core values.
When times get tough, it may be more important than ever to find something in which your business can become known as the best.
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Simple Small Business will, from time to time, review a business book that we think is worthy of your consideration. I think that it is only fair to warn you that I have spent most of my adult life studying business related books and I find that over time I am drawn to Biographies and Case Studies rather than non-fiction, strategic or instructional types of books. When you are first beginning the journey of entrepreneurship, instructional books are necessary because we lack a foundation of solid technical knowledge. After the framework has been developed, we will need guidance from someone with more experience. This guidance comes from actually listening to people who have done it. Understanding their struggles and how they overcame them can be extremely enlightening.
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“Four Seasons” is a book written by Isadore Sharp, the founder and CEO of the highly regarded Four Seasons Hotels. It is a forty year summary of his life and the evolution of the Four Seasons name.
In the introduction he begins by humbly admitting that when he started he knew nothing of the hotel business or any small business for that matter. His parents were poor immigrants from Poland and Isadore spent some time explaining how his family arrived in Canada and how his father wound up in the building trade. This was during the depression and as a small boy he would spend the day helping his father by carrying bricks or plaster, digging ditches and putting in a good hard days work. It becomes obvious that Isadore’s values came from his upbringing and it is important in understanding his philosophy in his dealings with businesses and with people today.
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I read a story about Ray Crock, the founder of McDonald’s (in the book “Focus”). Mr. Crock was with a bunch of young business college students one day when Ray asked them what business he was in. They said the hamburger business. He said “no, real estate. McDonald’s owns more valuable real estate than anyone else in America. Hamburgers were just a reason to own the real estate”.
Another question I read was how many people think that they could make a better hamburger than McDonald’s. Almost everyone raised their hand. Then, the speaker asked, then why aren’t you rich? It is because it is not about making the best burger. It is about perception, trust, speed, cost and other factors.
It took me a long time to come to some simple facts of life and manage a simple small business. Sometimes the simplest things are the hardest to understand. Humans naturally want to think that everything is too complex. For example, the most powerful way to be successful is to know what you want. The problem is that most people don’t really know what they want and what they are willing to do to get it.
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Summary: Go to the portable applications website and download their free portable apps suite plus any other programs that you may need to run your business. Stick them on a 4 or 8 gigabyte thumb-drive and run your entire business from any computer anywhere, any time. Save a ton of money and feel secure that no lost or stolen computer, computer crash or disaster will bring your simple small business to a halt.
I am a big fan of portable applications. If you are not aware of what that is, portable applications are small programs that reside entirely on your USB thumb-drive. These are the programs that you use every day on your computer like word documents, spreadsheets, graphic programs, etc. They take up no space on your hard drive, they don’t fill your computer with a bunch of garbage that slows your computer down and the icing on the cake is that most of these are open source and completely free.
To become familiar with what is available I highly recommend that you take a jump over to portable apps to see what they offer. There are other portable apps available from different sources, but this is a great place to get started.
Imagine being able to run your whole simple small business using the thumb-drive on your key chain or in your pocket. If your computer crashes, quickly buy or borrow another computer and in minutes you are up and running. Someone breaks in and steals your equipment or a fire destroys your office, no problem, you have got it covered. You are on vacation and there is an unexpected business emergency, use the hotel computer and jump in and get your company back on track.
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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 .
