The PROFIT Percent
Everyone is out to make money. More money. And more money. And if
you’ve put in some money already, then you’re out to make a profit,
plain and simple.
Still, one often, if not frequently, makes profit but still doesn’t
quite hit jackpot– or put another way, doesn’t feel as comfortable as
his seemingly lesser competitor seemingly making lesser profit.
So that one is eventually made to ask, What matters most in an
enterprise? Is there more to a stable, sustainable franchise than
profit? How can one truly maximise profit?
To answer the questions and to have a feeling of self-accomplishment,
one often suggests numbers: the number of workers employed, of brands
marketed, of products and services offered. Yet, as experience
(eventually) shows, to keep a business running one needs profit more
than numbers– and a certain type of profit at that.
It is (forgivable) conventional wisdom to say that one’s profits
increase with the numbers, but is this really true? And more
significantly, Is the increase in profit commensurate with (or worthy
of) the increase in numbers– with the consequent more salaries and
higher cost of maintenance?
To answer these curiosities, I share the following scenarios with you.
I.
I know a farmer who prided himself on having hundreds of pigs– well,
that was to put smaller farmers like yours truly in our place. Yet, he
did not put things in proper perspective– as the story next shows.
He soon realised that by not being able to care for all those pigs he
was running at a loss: his pigs did not grow so well as to sell off at
rewarding prices, yet he had to continuously spend so much to keep
them alive.
Needless to say, in order to limit his perpetual loss, he cut his
population to size and sold off most of his pigs– (again) at a loss.
II.
A poultry farmer I know was savoring the proceeds from her investment
so much that she was tempted to increase her intake, a temptation she
readily succumbed to, figuring it was the surest way to get richer. As
the story shows, however, it was not the purest way.
Rather than prepare for the swell, she simply got more day-old chicks
for her next production set. And as all rash decisions go, everything
was well for a while. Well, that was until they out-grew her housing
and stopped growing.
There was greater demand for feed and feeding, for attention and
cleaning, and for curtailing infections. And as all rash decisions go,
an epidemic broke out and her birds were cut to size– at inestimable
cost.
III.
Every transporter’s dream is to own a fleet. (Yeah, even President
Jonathan, though not a transporter, wants to expand The Fleet.) So
this transporter I know kept buying more and more trucks in a bid to
reach that critical mass that in nuclear studies leads to a chain
reaction (of profit).
Unfortunately, each truck has its own demands in terms of acquisition
cost, running cost and incident cost: trucks break down, are damaged
in accidents, and are abandoned when market demands fall, so that
eventually, he started selling them off until he was back right where
the profit became enticing– when he had only a few trucks.
Here’s the mathematics.
I.
I keep pigs, so I know that they’re probably the most gluttonous – and
prolific – of farm animals. They can literarily eat you into (and
beyond) debt.
Now if one pig eats 5kg in a day, two will eat about 7.5kg each. You
see, competition is an ass (not the animal). So that the more pigs you
have, the more feed you need– and by extension, the more money you
spend on feeding.
Now pigs are social animals so that they’re more active (and more
destructive) when they’re together. And there goes your feed– and
money! So much for numbers!
II.
Chicks need plenty of space. And when you attempt to raise 2 ,000 birds
where you raised 1, 000, then you attempt to feed chicks that are bent
on not growing. Yes, chicks too understand the concept of population
density– and overpopulation.
In overcrowding, there’s less ventilation and more heat. More heat
means more energy expenditure (vant Hoff’s law) which in turn means
more food but no growth, less immunity, and more deaths.
III.
The reason the transporter increases his fleet is to compete
effectively– to increase the probability of one of his trucks
clinching that extra spot.
Yet, each trip is laden with risks and costs. So that the more the
trips, the more the costs. And if you’ll permit me to speculate, the
profit brought in is not commensurate to the total cost of owning and
operating that extra truck.
Because more often than not, redundancy sets in: More trucks, more
competition. Then the roster sets in. Then you have to settle the man
in charge, and then the department in charge.
Multiply those costs by infinity and you quickly realize how the
profit plummets.
More numbers…
IV.
You have 100 pigs and spend 20 000 naira raising each to maturity (for
a period of, say, six months). You sell each for 45 000. Then you pay
your other bills; electricity, salaries, repairs… and end up with 40
000 per pig. Still good business, right?
V.
I have 20 pigs. And because they’re not so many, I avoid salaries (do
all the work myself) and my bills become (statistically)
insignificant. I spend less on feeding, say, 15 000 or less. I attain
45 000 per pig in the same six months as you, or less. Who’s the
better businessman?
Analysis…
IV.
Cost price = 20 000 x 100 = 2 000 000
Effective selling price = 40 000 x 100 = 4 000 000
Profit = 4 000 000 – 2 000 000 = 2 000 000
V.
Cost price = 15 000 x 20 = 300 000
Effective selling price = 45 000 x 20 = 900 000
Profit = 900 000 – 300 000 = 600 000.
My Scenario I farmer-friend has a farm statement just like IV, and
prides himself on being the better farmer since he makes more profit
than I. Yet, I always suspected that my farm statement, like V, is
superior.
A lot of people would prefer that two-million profit to the six
hundred-thousand. Who wouldn’t? But I wouldn’t. And here’s why.
Further analysis…
IV.
Cost = 2 000 000
Profit = 2 000 000
Profit percent (of cost) = 100%
V.
Cost = 300 000
Profit = 600 000
Profit percent = 200%
So I ask again, Who is the better businessman?
In the book Rich Dad, Poor Dad the author(s) explains the reason for
taxation as each government (department) having to employ as many
people as possible, sacrificing effectiveness on the altar of numbers
and political acceptance– and needing more and more money in salaries,
allowances and bonuses, and other costs.
The Bible says rather very early on, “Be fruitful and multiply and
subdue the [empty] earth”. (One instruction that continues to cripple
population control and family planning.)
Yes, there is such a point in a business when one has to expand and
subdue, but one must only do so insofar the point where profit loses
its percent is not reached, for one must not (in)advertently subdue
profit with numbers or profit percent with shear profit.
Such a point can be calculated– as can the equilibrium point between
supply and demand. But such calculations are beyond this scope of this
(simplified) article.
The figures used in this article as based on the everyday observations
and the active experience of the author, and are put within realistic
limits as every practicing pig farmer knows.
The author is therefore open to discussions on the (ramifications and
implications of the) issue discussed in this article: The PROFIT
Percent.
Ayokunle Adeleye.
Medical Student, OOU, Sagamu.
adelayok@gmail.com