- PROFIT AND LOSS
Profit / Loss is the money a business makes after taking into account all its expenses.
Calculated as follows:
Total Sales minus Total Expenses
Where Total Sales is more than Total Expenses the business has made a profit.
Where Total Sales is less than Total Expenses the business has made a loss.
- GROSS PROFIT AND NET PROFIT
There are two types of business expense –
- Those that relate to the products being sold or manufactured or to the service being provided. These are known as Cost of Sales or Cost of Goods.
- Those that are incurred in the day-to-day running of a business. These are called Overhead Expenses.
Gross Profit is calculated as follows:-
- Total Sales minus Cost of Sales = Gross Profit.
Net Profit is calculated as follows:-
- Gross Profit minus Overhead Expenses = Profit or Loss.
Total Sales 2500.00
Less Cost of Sales 1200.00
Gross Profit 1300.00
Less Overhead Expenses 1000.00
Net Profit 300.00
- COST OF SALES
The calculation of Cost of Sales is different for each type of business
- Retail: Cost of Sales is the amount paid for the products which are going to be sold plus the cost of getting them to your business premises.
- Manufacture: Cost of Sales is the amount paid for the raw materials used in making the product plus the amount paid for the labour which went into the making of the product.
- Services: Cost of Sales is the amount paid for the labour which went into performing the service plus the cost of any materials used plus (if applicable) the cost of getting to the customer’s premises.
- SELLING PRICE
Selling price is the amount you are going to charge your customers for your products or services.
It is calculated as follows:
Cost of Sales + Mark Up = Selling Price
- MARK UP AND MARK UP %
This is the amount you are going to add to the cost of sales to arrive at your selling price. It has to be big enough to cover your overhead expenses plus savings. A percentage (known as the Mark Up %) is normally used to do this calculation.
Cost of Sales 150.00
Mark up % = 75% 112.50
Selling Price 262.50
- GROSS MARGIN AND GROSS MARGIN %
Gross margin represents the portion of the sales value which the business wants to keep to be put towards paying for overhead expenses. It is expressed as a percentage.
Total Sales 2500.00
Less Cost of Sales 1200.00
Gross Profit 1300.00
Using the above example, the gross margin% would be calculated as follows:
Gross Profit divided by Total Sales x 100 = Gross Margin %
R1300.00 / R2500.00 x 100 = 52%
- WORKING CAPITAL CALCULATION
This is a calculation to find out how much money you need to have available to pay for business expenses plus additional product. The following information is needed:
- The total value of your monthly overhead expenses (use average costs for expenses like electricity and telephone).
- The estimated value of products that you want to buy in the next three months.
To do the calculation, add together the following amounts:
- Total Monthly Overhead Expenses x 3 months;
- Value of products you wish to buy;
- 10 – 15% extra in case of problems.
The answer is the amount of working capital you need.
- START UP CAPITAL
Start-up capital is the amount of money you need to get your business opened up and running. It has to be sufficient to pay for all or some of the following:
- Deposit on premises;
- Equipment / Shop fittings;
- Goods to stock your shop / Raw materials to use;
- Overhead expenses for at least three months.
- OVERHEAD EXPENSES
These are business expenses that have nothing to do with Cost of Sales.
Examples of some of the most common overhead costs
Salaries (not those associated with Cost of Sales)
Telephones and cell phones
- BREAK EVEN POINT / ANALYSIS
This is a calculation to find out how much you have to sell to make enough gross profit to pay for your overhead expenses. The following information is needed.
- Your average mark up;
- The total value of your monthly overhead expenses.
Average mark-up is difficult to estimate especially for new businesses but it gets easier when you have been trading for some time.
- Calculate Gross Margin % as follows: – (N.B. You can use any figure for sales in this calculation)
- Sales divided by average mark-up = Cost of Sales
- Sales less Cost of Sales = Gross Profit
- Gross Profit / Sales x 100 = Gross Margin %
- Calculate Break Even Point
- Total Monthly Overhead Costs divided by Gross Margin x 100 = Break Even Point
If the total of your monthly overhead expenses is R5300.00 and your Gross Margin % is 52% then your breakeven point is R10 192.00. In other words you need to sell R10192.00 worth of product each month to be able to pay for all your monthly expenses.
- CASH FLOW
The amount of money coming into the business from sales and other sources minus the money paid out for whatever reason.
- RETAIL, SERVICE AND MANUFACTURING
Please refer to FAQ No 10 for explanations of these terms.
- BUSINESS ENTITIES / BUSINESS STRUCTURES
There are many different types of business entities /structures available in South Africa. These are the most common.
- You start trading as yourself;
- You do not have to register the business;
- It is the simplest form of business and costs very little to set up or close down.
- There is no need to have a business name unless you want to;
- You have to declare your income to SARS so keeping proper records is essential;
- You cannot have partners, only employees;
- If your business fails, your creditors can sell all your personal assets (your house, car and furniture) to get their money back.
- Two or more people start a business together;
- They are joint owners of the business and are equally responsible for the decisions made on behalf of the business;
- You do not have to register a partnership but it is advisable to have a partnership agreement drawn up;
- Proper record keeping is essential;
- If the business fails, the people who are owed money by the partnership can sell all your personal assets (your house, car and furniture) to get their money back.
Close Corporation (also known as a cc)
- This is the easiest way to set up a formal structure however the Government is currently changing the rules that apply to close corporations.
Private and Public Companies
- These are legal entities heavily controlled by law. They are only used for medium and large businesses.
Wholesalers buy goods from other businesses and sell them to retailers and manufacturers. They sometimes sell direct to the public.
A contract is a document in which all the terms and conditions of an agreement between two parties are set out. Once it is signed by the two parties, it becomes legally binding upon each one of them.
Examples of contracts are lease agreements, employment contracts between employers and employees, partnership agreements.
- RENTAL AGREEMENT
This is a formal agreement between the owner of a building (the lessor) and the person or business (the lessee) renting space in the building. It sets out the monthly rental to be paid by the lessee and the length of time the lessee may occupy the space.
An employer is a business or person who employs other people to do work for them. Employers have to register with the South African Revenue Services for the payment of PAYE and UIF.
An employee is someone who works for another person or business. They can be employed part-time or full-time. Employees earning more than R5000.00 per month must register with the South African Revenue Services for the payment of income tax.
- CASUAL LABOURER
A casual labourer is someone who works for less than 24 hours a month for another person or business.
- SALARYS & WAGES
This is what people are paid for their work. Sometimes the words “salary & wage” are used interchangeably however.
- Generally however, the word Salary is associated with a person who has a full time position and who is paid monthly
- Wages is usually associated with someone who is paid daily or weekly or on an hourly basis – perhaps also earning overtime for extra hours worked.
- VALUE ADDED TAX (VAT)
VAT is a tax which is collected by businesses on behalf of the Government. This is done by adding 14% to the selling price of goods. Only businesses whose sales are more than R1 000 000 (one million Rand) per year have to do this.
- INCOME TAX
Income tax is calculated on the profits made by a business or on the earnings of an individual. The rate of tax differs depending on the type of business structure . For sole traders, tax is only payable when the salary paid to the owner plus profits is more than R60 000.00
South African Revenue Services
- SELLING ON CREDIT / SELLING ON ACCOUNT
When you allow a customer to take the goods they have chosen away from your premises with the understanding that they will pay you at a later date, you are selling on credit or on account.
Before doing this you must do the following:-
- Get all the customer’s particulars such as ID No, place of work, home address and telephone numbers;
- Get the names and telephone numbers of three other businesses who have sold to the customer so that you can check whether the customer has a good payment history;
- Record all the details of the goods taken, the selling prices and the total amount owing;
- Get the customer to sign for the goods;
- Agree on the payment dates.
- MARKET RESEARCH
Finding out what people want and can pay for.
Promotion of goods or services
Offering more than one type of product or service.
Concentrating on one particular type of product or service.
- BUSINESS CYCLE
Fluctuations in business activity caused by the following:
High season – low season;
Recession – boom;
High demand – low demand.
- STOCK ON HAND
The quantity and value of all the products you have not yet sold or the raw materials you have not yet used, whether you have paid for them or not.
- FIXED ASSETS
These are things that your business owns and uses in the everyday running of the business but they are not “used up” – in other words, they last for at least a year and much longer in some cases.
Examples of fixed assets
Land and buildings
Equipment and machinery
- CURRENT ASSETS
These are things that your business owns which will be used up or turned into cash within a year.
Examples of current assets
Cash in the Bank
Debtors (money owed to you if you are selling on credit)
Stock on Hand
- LIABILITIES – LONG TERM AND SHORT TERM
These are amounts your business owes to other people or businesses.
- Long term liabilities are debts you will take more than a year to pay off.
Example – Loans from the bank.
- Short term liabilities are debts you will be paying off in less than a year.
Example – Amounts owed to your suppliers.
Even though Fixed Assets last a long time, they eventually wear out so the real (market) value of an asset in the year it was bought would be much higher than its real (market) value after five years. Real or market value is the price you would get if you sold the asset.
Depreciation is the amount you put into your financial records each year to reduce the value of your fixed assets to realistic values. It treated like an expense and reduces the profit earned for the year.
- RECORD KEEPING
Record keeping means recording all the activities of the business especially where money is involved. This should be done on a daily basis.
Example of figures you should record
- Your daily sales figures;
- The amount you paid to suppliers for products or raw materials;
- If you are a manufacturer – the number of each type of product you made each day;
- If possible, the number of each type of product you sold each day;
- The amount you paid out for stationery or other expenses;
- If you are selling perishable foodstuff – the number of products you had to throw away because they were past their sell-by date.
- SUPPLY AND DEMAND
Supply is the amount (value and quantity) of a product you have available to sell. Demand is the amount of the product the customers want to buy. If you have too much or too many of a product, you will be left with some of them unsold but if you have too few, you will have lost sales because you were unable to supply all of the customers.
- SELL BY DATE
This is the last date on which you can sell a product because after that it will begin to deteriorate. This only applies to foods and other products such as cosmetics.
- GET RICH SCHEMES
These are offers, usually to do with investing money in someone else’s business, which promise big profits in a very short time. They should be avoided because they often end up with money being lost.
- LOAN SHARKS
These are people who offer to lend money at very high interest rates (often illegally high). Loans of this nature should be avoided.
Some businesses, such as retailers and restaurants, allow other businesses to use their name and sell their products under strict conditions set out in a franchise agreement.
- PYRAMID SCHEMES
Pyramid schemes are illegal in South Africa as they are a form of fraud. They are based on a non-sustainable business model that involves the exchange of money, primarily for enrolling other people into the scheme, without a product or services being delivered.