Profit = Revenue – CostHowever, this is very deceiving. The $ in Revenue and the $ in Cost is not the same!
In order to earn the $ in revenue, you need spend money on the cost of goods (neglecting the direct labor and other costs to be simple. The lesson is not lost). Let’s take a simple example of a hawker selling chicken wings. He sell his BBQ chicken wing at $1.00 each. He buys his raw chicken wing at $0.50 each. If he burnt 1 chicken wing, he needs to sell 2 chicken wings to cover his lost. An increase in cost of $1 needs to have increase in revenue of $2 to cover back if the gross margin is 50%. Most business has lower gross margin than that, if the gross margin is 33%, you need to sell 3 times more, and if 25%, you need to sell 4 times more. So we can see that
- A Dollar of cost added, needs, a multiple (at least 1/Gross Margin) of Revenue to offset.
- A Dollar Saved in a Dollar saved into the bottom line. The increase in Revenue is not so certain.
- A Dollar Saved is NOW – cash on hand not spent. Revenue is in the future to be paid and collected.
The Ancient Chinese has a teaching on this small accumulation of little here and little there to becoming a strong force in I-Ching 09小畜 Small Accumulation – Improvement in Details (subscription needed).
Summary of 09小畜 Small Accumulation :
- We don’t just pay attention to the ‘big’ things and ignore the small details.
- Strength is built through continual accumulation of little.
- We should not despite thing because of its little size. Critical issue may be in the details.
- Small improvement is good.
- Detect and fix defect as early as possible.
- Accept the corrections by others.
- Infighting derails the company.
- Develop integrity and trust.
- Trust comes from Benefiting Others
- Don’t overshadow your superiors
Lim Liat Copyrighted 2010