in this video i want to take a look at something from the point of view or perspective of a small
business owner or anybody thinking about setting up a small business my background is in small
business and years ago i was very much involved in retailing and so forth and some of the ideas and
some of the concepts some of the formula some of the terms that you should be familiar with
from the perspective of a small business are ones that i'm going to deal with now but you need to
be absolutely crystal clear about what these terms are and what they mean because without
an understanding a basic fundamental understanding of what i'm going to explain to you in this video
then you should stay away from selling up or running a small business until you understand
this okay so let's take for the sake of this our example a business called abc small business
you can call it what you like and it can be a filling station or it can be a coffee shop or
it can be a nail and a hair bar or a beauty salon or a hairdresser's or a barber shop or a pharmacy
can be any of those businesses you're going to have a figure like of weekly sales or turnover
the term sales and the term turnover are kind of interchangeable but anybody involved in a small
business anybody involved in retailing would use those terms interchangeably i would know
precisely what we're talking about for the sake of argument and for the sake of this example i'm
going to assume a sales figure of 50 grand a week okay now you're not going to do 50 grand a week
in for example a nail bar or a beauty salon or a barber shop but you will do it easily
in a filling station or a convenience store or something of that nature some high volume business
in terms of turnover then let's assume cost of sales is 40 000 the gross profit is 10 grand okay
the gross profit margin then is 20 percent that is ten thousand divided by fifty thousand which is
the sales so gross profit divided by sales is your profit margin or also known as the margin mark-up
is slightly different and people confuse the gross profit margin or margin and markup all the time
markup is gross profit as a percentage of the cost of sales so in this situation the markup
will be 25 because it's 10 grand divided by 40 grand that gives you 25 that's the markup and if
you are in a cash business or any business and you don't know the difference between
gross profit and markup then you really need to get it clear in your mind now if we take
a look at the few expenses that i've put into this word document on the left hand side here
you'll see rent rates wages miscellaneous insurance bank charges and you'll see behind
each of those expenses i have an f or a v the f stands for fixed cost the variable or v stands
for variable costs so the rent and the rates for example on a particular year the insurance in a
particular year they're fixed costs so let's say the insurance is three grand if you open your shop
five days a week or if you open your shop seven days a week or if you take the month off and only
open for you know 11 months of the year or if you only open for six months of the year the cost of
the insurance is fixed it's the same it makes absolutely no difference with the open or close
the same story applies or the same principle applies to for example rates
let's assume that the rates are two and a half grand a year that's 50 euros a week
then your rates per annum is two and a half grand and that's it makes absolutely no difference to
the local authority whether you open or close or do what you like you're still going to pay
rates of two and a half grand 50 hours a week and the same applies for the rent if you have
a rent or if you have a lease and you're paying 25 grand a year that's 500 a week that's what the
rent is and again the landlord really doesn't care whether you open or close perhaps you open monday
to friday perhaps you open seven days a week perhaps you take a month off and go to wherever
on your holidays assuming that you could go anywhere with the cover 19 situation going on
but bottom line is the landlord still wants his rent and he doesn't care whether you open or close
so again that's a fixed cost however a variable cost that i have there is wages so let's say you
have a business which would have let's say a petrol station under the car wash on it
let's say the car wash is really busy you could have a couple of young lads in there
watching cars to beat the band and they're flat out and it's a busy time of the year
if the car wash was broken for example you might let those lads off you wouldn't be getting them in
or you wouldn't need the staff that's a variable cost so you're not going to have the same fixed
cost every week the cost of your wages will vary depending on the level of turnover again
if your turnover drops from say 50 grand to 25 grand clearly you have less need for staff in
the 25 grand scenario vis-a-vis the 50-grand scenario so your costs of wages will reduce
that's a variable cost you need to be clear on fixed costs and variable costs because you
might be able to do something about variable costs you can't do anything about fixed costs
but these ideas these concepts of turnover cost of sales gross margin markup
fixed cost variable cost are absolutely key obviously down at the end there then you
have a profit of net profit of 4050 and that's the gross profit less the total expenses which is 5950
and then you have a net profit margin of 8.1 percent and that 8.1 is 4050 divided by
your weekly sales which is 50 grand that's the 8 or 8.1 percent profit margin hope you find this
video useful if you do give it a thumbs up down below and you might indicate below in the comments
whether you'd be interested in any further videos similar to this one to do with small
business and the basics of ratios and accounts and fundamental concepts that you must understand if
you're running a small business let me know in the comments and i'll do a few more of them and
if you don't that's fine i would appreciate if you give the thumbs up down below don't thanks a
lot