Profit and Loss
Have you ever wanted to start a small business of your own? Or tried to raise funds for some event? How do you know if you’re going to make money or lose money? Sometimes, we might think we’ve made money. But when we note what we had to spend in order to make that money, we see that we made a loss, and not a profit!
Samke is so excited to get going that she doesn’t think carefully about the profit she will make, when she takes into account all the expenses she has to pay upfront. This means that in the end she makes a loss. On the other hand, Busi works out her profit and loss statement very carefully and does raise money for the Matric Dance. How could Samke have been more careful about making a profit?
The first thing that Samke does is to overspend on buying products for her first client. Busi is more careful and buys the items she needs at a wholesale price from Ma Ruby, who buys items in bulk. This means that the items Busi buys will be cheaper than the items Samke buys, therefore Busi will automatically make more money on her product than Samke.
Here are three factors that influence the price you need to charge for your product or service.
Labour and supplies
This factor includes all the products that Samke needs to buy in order to braid or style her client’s hair. It also includes the cost of Samke’s labour (time) that it takes her to braid or style the hair. The cheaper Samke can source her products, the better able she is to make a profit at the end of the day. Buying products through a wholesaler or through someone who can buy items in large quantities, such as Ma Ruby, would help her reduce these costs.
This includes the cost of water, electricity and any other items that cost money that you have to pay for when offering the service. Because Samke is offering this service at home at the moment, she will need to pay into the family budget for these items. If she was starting her own stall, then she would also need to pay rent for it. Each time an overhead is added, the potential profit is reduced.
Profit is the money you make after you have paid your labour, supplies and overheads. If Samke doesn’t cover these expenses and comes out with no extra money, then she has made a loss and not a profit. Usually, in the hair stylist business, you would want to come out with about 10 to 15% profit at first. Because Samke is only starting out she will not be able to charge what an experienced stylist would charge. She will need to start low but still make a small profit.
So how do you work this out before you’ve even had your first client? You need to plan by drawing up a projected (estimated – what you think it will cost) profit and loss statement. Remember that the money your business makes, minus the money it spends, will tell you what your profit is. If Samke had put together a projected profit and loss statement and seen what her expenses and overheads would be, she would have realised that she would make a loss if she charged her client, say, R300. However, if she had two clients, or bought her products wholesale, she may have made a profit! It’s inevitable, though, that Samke would have had some start-up costs, such as the hair products she needs. Therefore it would be very unlikely that she would make a profit on her first client.
This is why it takes careful planning to make sure that you do make a profit in the end. For Samke to really make a go of her business, she needs to promote herself on social media so that she can attract a number of clients.
Other things Samke can do to attract clients to her business to make it profitable:
• Start small, with only one product or service, but if demand increases, then offer more services. For example, Samke can start with hair styling but later also include nail care.
• Find a gap in the market in your area. For Samke, perhaps this is special occasions and Matric Dances. But she needs to wait until she has several clients lined up before buying products, or she must buy them at the lowest price.
• Keep records of your customers so you can contact them later. For Samke, this could mean keeping a diary with her clients’ details, so that she can re-contact and book clients in the future.
• Provide your clients with a good experience. For Samke this means having a clean and comfortable space to do their hair. Perhaps Samke will need to invest in a good chair for her clients to sit in.
• Treat your clients professionally and make sure that they leave satisfied and happy. Satisfied clients will tell their friends about you and you’ll get even more business.
From now on, Samke will need to source her products at the lowest possible price. She must make sure that she understands all her expenses and overheads and then she can work out what her rate should be. If she hopes to have 15 clients per month at R300 per session, then she will receive R4,500 from her clients. If her expenses then run to R3,000, she will have made R1,500 profit.
Once Samke becomes a little more established, she can approach the Small Enterprise Development Agency (Seda) to apply for funding to grow her business. This agency also helps small businesses with writing business plans and shows you how to grow your business. Find out more here.
Because Samke is younger than 35 years old, she could also approach the NYDA Grant Programme (National Youth Development Agency). This provides young entrepreneurs with opportunities to access both financial and non-financial support to enable them to establish or grow their businesses. Find out more here.