It’s about opportunity cost. Think about your net profit. Start with cost of goods sold. In a physical products business, this can be a large chunk out of every dollar you sell.
Then you’ve got all other expenses – legal, accounting, office or home office, advertising, travel. And if you’re lucky, you may even have wages and associated expenses, and corporate income tax if after all that the business is still turning a profit.
Look at your last year’s numbers, hopefully you’ve got an income statement (also called profit & loss) statement prepared by yourself or an accountant. Look at the top line (revenue), and the bottom line (net profit). Divide the bottom line into the top line. Let’s say the top line is $20,000, and the bottom line is $4,000. That’s 20% net profit.
Now, think about buying a $5 latte with part of that 20% profit. In order to make $5 net profit, you had to generate $25 of revenue!
$ cost = __$ spent___
net profit %
So a $5 coffee actually costs:
$5.00 = $5.00 = $25
So if you sell a $25 product, one latte can offset one sale completely. If you have 30 lattes per month, that’s thirty $25 sales you have to make just to get past coffee expenses!
Most people in business think, “Well, I can write off that $5 expense, so I’m actually saving money.” Sure, you can write it off, but that only matters if you are actually making a profit, and the more you spend, the less chance of making a profit you have!
If you keep this in mind when spending even small amounts on your business, you will think twice and most likely save yourself some money and increase your profits!
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