Tuesday, May 1, 2012

What is profit?

In elementary school we learnt profit and loss account this way:

Rama bought 10 apples at 5 Rupees each and sold them at 6 Rupees each. What is the profit made by Rama?

The answer is: Rama made a profit of 10 Rupees.

Unfortunately in real life, turning out a profit is much more complicated. Suppose Rama is a fruit-seller selling only apples. He has to go to the whole-sale market and buy a basket of apples. This involves transportation
cost up and down. Then he has to go from house to house to sell his apples. He may not be able to sell all of
his apples in one day. He has to throw away a bad apple or two. And so on. And if he were a bigger seller having a shop in the local market: He has to spend on rent, electricity, an assistant, some plastic bags and so on. We know all this in the back of our mind. Yes, in the back of our mind.

Similarly, if I bought an air-conditioner for Rs.20,000 and sold it for Rs.21,000 - would my profit be Rs.1000?
The answer is an emphatic NO. But unfortunately many dealers tend to think that the profit is Rs.1000 whereas in reality Rs.1000 represents the gross margin.They have to calculate all their expenses over a period of time and the revenue earned in the very same period and arrive at the margin. Profit = Gross margin minus the sum of fixed and variable expenses. They all know this at the back of their mind.

It is high time they brought it to the forefront at all times!

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