Six General Rules For Determining Profits
( Originally Published 1912 )
The following general rules will apply to any business and help in determining what its profits ought to be.
1. The first thing which every business man should do is to figure accurately his fixed charges. The fixed charges are any fixed expenses which the firm will have whether it does any business or not-rent, light, heat, insurance, taxes, stationery, telephone, up-keep of the property and the salaries of its employees, to do business under normal conditions. Every business man should make a careful estimate of what his fixed charges are going to be for the ensuing year.
2. In addition to the above, every business man should make an allowance for unusual expenses, such as accidents, emergencies, repairs of an infrequent character. If this allowance is not made, then those unusual expenses will come out of the profits of that one year. In many failures, it is just such an unexpected thing as the above which puts the firm out of business. If, however, such an allowance is scattered over several years, then when the unexpected happens the business has, in reality and practically, been covered by the "insurance" piled up against it each year.
3. A third allowance ought to be made by every business for bad credits. The total amount of business done on cash is so small compared to the grand total of all kinds of business transacted, that this rule applies to practically all business men. Any concern which figures that it is going to collect all of its money due, is simply inexperienced, and so optimistic that it is an unsafe risk. Hence, an allowance must be made for the money due which cannot be collected.
The cash store, or other business firm doing a strictly cash business, has losses peculiar to itself, which fully offset the losses through uncollectible accounts. (See chapter "Cash or Credit, Which?")
4. In addition to fixed charges, cost of materials, unusual expenses and poor collections, you must figure out what it will cost you to handle your business. Every dollar's worth of any new business that you get, after a certain amount is reached, will cost you a certain percentage to handle. You might as well figure that percentage in advance. If you increase your business five hundred dollars, or five thousand dollars, or fifty thousand dollars, or five hundred thousand dollars, or whatever amount you have set your heart on, just figure out how much more it is going to cost you to take care of that business. Don't trust to luck. Face the facts. Know the game you are up against. Win because you are not working blindly, but are using the creative and organizing and planning faculties with which you are endowed. Right here, read the chapter entitled, "The Planner Versus the Plugger."
Appropriation for Increasing Business
5. Provision should be made by every business man for increasing his business. A business which is not going ahead has the elements of failure in it. If it stands still long enough, it will go backward. When it does start on that down-grade, it will be mighty hard work to reverse and start up again.
The Fight for More
Furthermore, even the best run business is continually losing good customers by death or removal, and many other causes. Unless active means are taken to replace those old customers continually, the business cannot even hold its own. In this age the fight for business is constant and vigorous and relentless. Unless a business man is fighting all the time as described in the chapter entitled, "The Fight for More Business," his firm would not be a good in-vestment. He cannot hold his own. He will be sure to remain "small fry," and to be absorbed by some of the bigger and more progressive concerns in his line.
The usual method of getting more customers is through an appropriation for advertising, but that appropriation will not produce the proper results if the business itself is not so conducted along modern lines as to take advantage of the advertising, and make that advertising thoroughly representative of the business itself.
Add Your Profits
6. When you have figured up all the above, then add a legitimate profit. Don't let your profit be "whatever is left after you have paid your bills." Do as the big business men do; as every well organized incorporated business does—make a definite estimate of your profits and try to hold your business up to that estimate of those profits. Whatever you clear, in excess of the estimated profits, is extra, and can be used as an additional dividend or as a sinking fund, or for enlarging the business.
The loss of profits, in almost every business, is due to lack of knowledge of the costs of doing business in that line, under the conditions surrounding the firm in question. Indeed, many concerns do business without a clear, definite idea of what they have done or what they are going to do. One of the great steps in the progress of modern business has been the persistent search for correct cost finding and cost keeping.
Many volumes have been written on the subject, and many more will be written.
If this volume aids, to even a small degree, in stop-ping the general habit of doing business in a hap-hazard way, it will have served a valuable purpose in the commercial progress of America.