Business – What is the best way to do to get profit ?
Business People, If I ask them why You are doing Business instead of putting money in a Bank Fd? They used to reply to get a profit.
Why People do business instead of keeping their money in Bank Fd?
Then, they used to give me an answer that they are doing it to get more profit.
But this is not the right answer.
People do biz in order to get more return over and above inflation.
Why because of inflation money will lose it’s purchasing power.
Read this article to understand inflation and its impacts on the purchasing power of money.
Here, in this article, I will try to explain what is the right way to do biz in order to get a profit in it.
The reason for writing this article about business is…
I am writing this article because recently a biz person met me for ” Financial Planning”.
Frankly Speaking, that Person does not know how a Certified Financial Planner is useful.
In addition, that person is a big biz owner having 3.5 crores turnover per annum.
Moreover, He is the number one biz person in terms of turnover.
But He is having some bank loans as well as hand loans ( 19% per annum interest).
After understanding his biz and his personal financial goals, I understood his Business Health and his personal Financial Health are so weak.
I gave him good “Financial Planning”, and suggested some changes needed to be done in his biz.
However, I do not know to what extent he will implement the planning given by me.
I am thinking about writing an article about the best or right way to do business to get profit.
Moreover, I found many people staying away from ” Financial Planning ”
Majorly only Salaried class is following ” Financial Planning “.
But even biz people also need ” Financial Planning “.
As they are doing it for their family ” Financial Goals” only.
But the real problem is prior planning for ” Financial Planning ” all these biz people need proper ” Business Planning”.
I hope my article may help some of you to plan your biz Plan well.
There are several steps you have to overcome, then only You will get a profit from your biz ?.
So, let’s learn about those steps.
Step 1) In getting a good return from the biz, you have to recover the purchase price…
In your biz, you need to maintain stock in order to sell that stock ( products ).
Moreover, for acquiring the products that you are selling in your showroom, You may have invested the “X” amount.
In addition, You will get some return from your investment only when you will recover your purchase price when you sell the product.
Hence, Your first goal while selling your products at your showroom must be the Purchase price.
I.e you must recover your invested amount (X).
Step 2) To get a return you have to recover depreciation…
You may have bought some machines or products to run your biz ( computers, cars, etc ).
But the value of these products will be depreciated as they get old every year. ( ex… 20% in case of computers ).
Step 3) You need to recover the GST from the customer in the biz…
If you are in the Composit scheme of GST, then you have to pay the GST from your own pocket.
In addition, in this composite scheme of GST, you can not charge customer GST.
Moreover, You need to pay GST from your own pocket.
So, You have to increase your product cost in such a way that you can recover the GST fee also.
Ste4) You need to recover the Expenses …
You may have spent money to give salaries, power, etc.
Here, You need to recover all these expenses.
So, you need to consider to increase your product cost in such a way that you can recover your expenses too.
Step 5) you need to recover the Loan E.M.I in your Business …
If You have taken a Loan for the Biz purpose and maybe paying E.M.I for that Loan.
Then you need to recover the Loan E.M.I also from the customers.
Hence, You need to hike your product cost in such a way that you can recover your loan cost too.
I.e Loan E.M.I.
Most people are falling into a debt trap in order to increase turnover.
As a result of this debt trap, People end up making a loss in their business.
Step 6) You need to hike product price in such a way after paying income tax, Some reasonable profit left…
Income tax to be paid will be different for different businesses.
But you should make sure that some reasonable profit or return on investment is left after paying taxes depending on the type of Biz that you are doing.
Step 7) You need to get a minimum of 10% extra return than Inflation in your Business…
Here, we are talking about inflation last that doesn’t mean it has the least importance.
As I said at the beginning of the article, People actually do Biz to get more returns than inflation.
Moreover, the more return above inflation you get will be better.
As money loses it’s purchasing power due to inflation, people to conquer this inflation risk prefer doing Business.
What the formulae to do a Business…
I think you understood all the 7 steps which I tried to explain to you.
In addition, after looking at the above data, we can define a formula for doing a Business to get good profit.
The formulae will like as shown below…
Real Profit in the Business = Turnover – Purchase cost of Products – Depreciation of Machines – GST Paid – Expenses ( Salary, etc) – Loan E.M.I
– taxes – Inflation in the financial year.
What to do if the return % is negative with the above formulae…
If the return “%” is negative arrived by using the above formulae.
That means your investment is not giving an inflation-adjusted return.
As a result of this, your amount invested in the Business will lose it’s purchasing power and you will be forced to close the Business one day.
In addition, You may become poor one day.
In order to prevent this you have to try to lower the expenses in the Biz and at the same should try to increase the turnover.
Else, It is better to close the business immediately.
What to do if You get a ” +ve” return by using the above formulae?
If you got a “+ve” return with the above formulae means that your Business is making some profit over and inflation.
That is really good.
But do check that how much more % you are getting over and above inflation.
Let’s say if the inflation in the Financial year is 5% and if your Business has delivered an extra return of only 2% only over inflation.
Then, You are catching only a Mouse by digging a huge Hill.
Why because for doing Business you are doing a lot of effort.
2% extra return over and above inflation, you can get easily by investing equity, equity mutual funds, and real estate, etc.
Moreover, for investing in equity and equity mutual funds, there is no effort required like in the Business that you are doing.
However, If you get 2% extra return over inflation means, your money is able to retain it’s purchasing power.
What is the healthy ROI in Business by using the above formulae?
I have said already that 2% extra return over inflation is not good after putting a lot of effort into your Business.
According to my knowledge, If you can get return “%” of at least 10% over and above inflation, then that return can be said as a healthy return in Your Business.
Recently, I heard one of the Companies in my city of residence Kakinada is about to be closed.
It is a Pesticide Company and it has been running in losses for the past 10 to 15 years.
In addition, Company Management tried to improve Business but failed to do so.
I got a call recently from a person recently.
In addition, that person is a Contractor, and he has been doing this contract Business for 3 years.
Moreover, He took Bank Loans to run the Business by keeping his house as a mortgage.
But I have found that this person is making a return after considering inflation into count.
I have advised him to do some actions in order to improve his overall Business and Financial Health.
Finally, It’s not easy to set up own business and to earn more return than that of inflation.
In this process, You may end up losing money.
But You can still get more return than inflation by investing in other people’s good businesses which are having a healthy return on investment over and above inflation.
If you do not know, How to get this kind of return of 2% to 4% over and above inflation with your investments in Financial Assets, Then it’s better for you to hire a Sebi Registered Investment Adviser.