Chapter 24
Making a Profit
It is no secret that organized crime in America takes in over forty billion dollars a year. This is quite a profitable sum, especially when one considers that the Mafia spends very little for office supplies.
—Woody Allen
The name of the game, of course, is making a profit, and there are many factors that go into the equation: overhead, markup, and what the competition is doing, for starters. In this chapter, we will examine how to make a consistent profit and what to do if you are not.
Computing Your Profitability
As a concept, profit is easy to understand. It is the difference between what it costs you to make or buy your product and what you earn from selling it. It is when you break down this seemingly simple concept that things get a little complicated. When it comes to profit, there are four components to understand: gross profit, net profit, profit margin, and markup.
Gross Profit and Net Profit
The gross profit on a product sold or service rendered is computed by taking the money you brought in from the sale and subtracting the cost of goods sold (COGS). Net profit is your gross profit less taxes and interest. Net profit is the same thing as earnings or net income.
Cost of Goods Sold
COGS represents the costs you actually incur in making the product or service. For a product, it includes raw materials, labor, and other directly associated costs. For a product that you sell, it is your wholesale costs.
Computing Your Profit
Keeping a running ...
