21 Jan Business Alchemy Lesson 8–How Much Pie Do You Get? (The constants)
I begin this post with two disappointing bits of news. Number one, I will not be continuing the car analogy with this post and number two is that I think a little more background is important before we dive into the meat of analyzing and improving your business.
This thought came to me as I drove home a couple of evenings ago. I was listening to Dave Ramsey on the radio (I am not a huge Dave Ramsey fan for reasons I would be happy to discuss with you, but I do think he teaches people to be very responsible citizens when it comes to money).
Anyway, a lady called in that had a business and she didn't really understand what was going on with her business. She struggled with understanding profit. At this point, I realized that it would be beneficial to share an excellent tool you can use for budgeting and for understanding your profit.
For this conversation, I use Thanksgiving and, more specifically, pie. My family loves my mom's pies! And since I am assuming that you love pie as much as me, I will break this conversation up into a couple of posts so as not to overwhelm you and save some pie for tomorrow, if you will.
Here is the problem with my mother's pies, if I am waiting for everyone else to eat their pie before I serve myself, it varies each year how much I will end up getting to eat. Some years we have more family there than other years. Some years there are people that eat more or less than they did the previous year. This changes the amount of pie left for me, assuming that I wait for everyone else to finish first.
The solution to the problem of how much pie I get begins with the things that are consistent. Every year, my mother and father will both be at our dinner and eating pie. My mother will eat one piece of pie. If I am there, my wife and children will be there also. My wife and each of my three children will eat one piece of pie.
I have two brothers and two sisters that may or may not be there and each will come with their spouses and children. I can pretty much go through ahead of time and figure out which of my relatives will be there and which will eat the same amount of pie each year and separate those from the variable eaters.
When all is said and done, I know what my constant, or fixed, amount of pie is that will be consumed and therefore, I am one step closer to knowing how much pie I will get to eat.
I am building this analogy up to a final discussion on profit. In order to give you all the tools you need to build budgets and understand your profit, it is important to understand the fixed costs of your business.
The constants discussed above are the fixed costs of my pie scenario. You can look at your costs over the past year or month and pick out the costs that you have every month that are the same amount. These are your fixed costs. Now that you have picked these costs out, total them up and set them aside for the next part of our discussion.
Understanding profit takes some basic knowledge first and that is why all of the buildup because as you already know...
...Without Foundation, your business fails!