05 March 2011

Dollar Saved is Different from Dollar Earned

This is all too obvious.
Profit = Revenue – Cost
However, 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
  1. A Dollar of cost added, needs, a multiple (at least 1/Gross Margin) of Revenue to offset.
  2. A Dollar Saved in a Dollar saved into the bottom line. The increase in Revenue is not so certain.
  3. A Dollar Saved is NOW – cash on hand not spent. Revenue is in the future to be paid and collected.
So before you spend your additional cost dollar, think about how much more revenue you can generate with dollar added. Could it earn more than the dollar spent and gone!

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 :
  1. We don’t just pay attention to the ‘big’ things and ignore the small details.
  2. Strength is built through continual accumulation of little.
  3. We should not despite thing because of its little size. Critical issue may be in the details.
  4. Small improvement is good.
Additional wisdom from the stage lines are:
  1. Detect and fix defect as early as possible.
  2. Accept the corrections by others.
  3. Infighting derails the company.
  4. Develop integrity and trust.
  5. Trust comes from Benefiting Others
  6. Don’t overshadow your superiors
See Ancient Chinese Wisdom for other wise words.

Lim Liat Copyrighted 2010

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