From the course: Understanding Business

Making a profit

From the course: Understanding Business

Making a profit

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- To understand business is to understand profit. It's what every company dreams about. They dream about it because making a profit isn't easy. In fact, many companies you love or perhaps consider successful still haven't turned a profit, and for those lucky enough to be profitable, it probably took them years to turn a profit. Companies like FedEx, Amazon and ESPN all went more than five years without making a profit. How can this be? Well, let's discuss what profit is. Profit is the amount of money left over after a company pays all its bills. To calculate profit, you use this formula. Revenue minus cost equals profit. Revenue is the amount of money collected from customers. Often, companies have multiple revenue streams. For example, a massive company like Starbucks collects money by selling coffee, food and other merchandise at their Starbucks stores. Another revenue stream is money made from selling Starbucks food and coffee to certified Starbucks shops, like the ones you might see at grocery stores or in airports. Starbucks doesn't run these stores, but they get money for selling them the ingredients and equipment, and still, another revenue stream is the money that comes from selling Starbucks coffee beans and pre-packaged beverages in grocery stores. These are just three types of revenues for Starbucks, and there are so many more. But, we need to remember costs, and just look at this short list of costs that Starbucks needs to pay to keep their business running everyday. As consumers, we see all the things Starbucks sells everyday and seemingly everywhere, but we sometimes forget about the costs they incur to keep Starbucks running and to deliver those products to their customers, thus, managing a company to profitability is a tough job in a very delicate balancing act. For example, if we increase our marketing costs, we might sell more coffee, but will the increased revenues be big enough to pay our advertising costs? If we buy cheaper coffee beans, our material costs would decrease, but customers might not like the cheap coffee and stop buying coffee from us, and then, revenues might go down. Perhaps you've thought about owning your very own, privately owned coffee shop. Could you make that business profitable? Start doing the math. How much revenue would 100 customers per day generate? Now calculate the costs of materials, energy, real estate, and employees. Now you're thinking like an executive. As you go to every meeting and discuss new project opportunities, think about the revenue and the costs and see if you can think of ways of making that business venture a profitable one.

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