If you purchase bread at K1.00 and sell it for K2.00, your profit will be the difference, which is K1.00. [Quite obvious, right?]. But when a business involves multiple products, a series of processes to get the products ready, and a chain of processes to access customers, calculating profit becomes a web of math.
Cake Palace, as a production company, has many activities at the back-end. As such, it is difficulty to clearly draw lines between profits and losses. Most of the times, all you see is money, but you don’t know what percentage of the money would cause losses if mishandled, and what percentage of the money could be deposited permanently without causing a hiccup in the production system. Many small business, like Cake Palace, that have blur colors around the money have many conflicts between the employers and employees. Usually, employees can steal money, but the employer will take too long to realize it, or will not realize it, until a ‘big enough’ percentage is stolen, or will not clearly tell what stage of operation was affected. In such, companies, most business owners prefer staying close to their businesses and get involved in every activity of the business. Since humans, in their natural state are limited by space, time, and ideas, these business owners make their businesses small, for the sake of easy inspection. Unfortunately, that inhibits growth of their businesses. Thus, it is common to see old small businesses, in Lilongwe town, that are stagnant, even if demand for their products is enormous.
Cake Palace is one of those business which don’t have precise and accurate ways of dealing with numbers, thus, we, the managers, are always involved at every stage of operation. In fact, sensitive areas, like the selling point and purchasing raw materials, are done by managers.
My summer time master plan on how to allow Cake Palace gain a foundation for unlimited growth included taking away managers from the operation process, and that could only be possible if I devised a system that Cake Palace could use to accurately calculate profit. My starting point was to put all the numbers in a spreadsheet, starting from cost of rent, salaries, raw materials and many more. By then, I had just discovered numerous advantages for using a spreadsheet. Two most important being a spreadsheet can be accessed from anywhere and from multiple devices, and a spreadsheet is easy to keep, unlike, books which tend to be bulky as records increase. However, to access a spreadsheet meant that we needed to purchase a computer. Fortunately, a few days later, we bought an office computer.
The next challenge was to then calculate all the variable expenses that Cake Palace incurs per day, using a spreadsheet. This exercise made me a friend of receipts. Every time someone purchased something, I had to record it and safely keep receipts. As for fixed costs, it was easy to record. (Variable expenses are costs that vary with production quantity. These include, flour, milk, et c. Unlike variable costs, fixed costs don’t directly determine production quantity. These include, machinery, salaries to employees, and cost of renting the business house). To calculating daily profit, however, calculating costs is only half the task. As such, I had to also devise a way of calculating daily sales.
Calculating sales is effortless for established shops because they have receipt printers. Unfortunately, Cake Palace does not have any. There is no any system that records any transactions we do with customers. The only way we calculate sales per day is counting the total money at the end of a day. Unfortunately, calculating money at the close of a day is not accurate, because, while selling, various expenses are made. Secondly, after the day is over, there is no any history kept about the sales. Thus, if someone steals money from sales, and is not caught in a span of a day, there is no evidence that could be used to catch him/her. But looking at our resources, the only option I could use, in place of a receipt printer, is a spreadsheet. If a salesperson can record every transaction on a spreadsheet, we could accurately calculate all daily sales as much as a receipt printer does. Unfortunately, none of the Cake Palace sales personnel has the typing speed that is fast enough to maintain fast transaction while using a spreadsheet. Thus, my idea was dropped. So, I had to jump on the other shop, the retail shop.
The retail shop has way fewer customers than the retail shop. Thus, we could use the retail shop as a test spot for the general operation of Cake Palace. Surprisingly, just like the main shop, the retail shop could not have fast transaction when the sales person was using a spreadsheet. As such, I had to make a few changes to the way a salesperson should engage with spreadsheet.
The most profound change was that the salesperson will have to use the spreadsheet only once per day (for approximately 1 hour), when closing the shop. Firstly, she’s supposed to record a name and quantity of each product that was added during the day (we call these items additionals). After that, formulas in a spreadsheet template that I created sums the quantity of items that remained the previous day and additionals of the current day. In so doing, every item has a cell of a sum of remains and additionals. Next, she’s supposed to record the quantity of each item that is going to sleep in the shop (we call them remains). From there, the template finds the difference between the sum (mentioned above) and the current day’s remains. That difference is the number of sold items. Furthermore, the spreadsheet multiplies the number of sold items by the selling price to calculate the total cash expected.
There after, the managers compare the expected cash (that is calculated by the spreadsheet) with real cash that is delivered by the salesperson. This way, the spreadsheet does not only allow managers understand numbers, but also inspect the performance of the salesperson. The system is not powerful enough to be used in the main shop, however, there has been a notable progress during the period of utilizing the spreadsheet. And the latest progress has been a surprise.
I was recently surprised to realize that the spreadsheet could actually be used to accurately calculate profit per month. Just that simple math explained above is repeat over a month and the sum numbers can be used to calculate monthly profit. In so doing, I calculated average profit for a month and found that the retail shop makes MK300,000 ($400) per month. Due to this information, we are now planning to create a Banki M’khonde account for the retail shop. The account involves one deposit of MK500,000 ($674), and monthly loaning and paying back at an interest. After a year, equal shares of the Banki M’khonde shall be distributed among all the accounts. (Further information about Banki M’khonde is explained in the blog, ‘Day 26: My Father leaves for South Africa’).
Than ever before, I am optimistic that very soon a clear line shall be drawn between profit and loss. Inability to do this task keeps a business operating as a hand-to-mouth business forever. Most small scale businesses make profit, but they don’t know what profit they make. They can estimate how much revenue each product or service can potentially bring, however, they don’t have tools or expertise to help them evaluate all costs and revenues that can be used to calculate profit. Thus, they end-up operating the business without saving anything significant. Cake Palace is one of those small scale businesses in ‘darkness’, but with time, I am sure that we will develop a simple spreadsheet-based system that can accurately calculate profit we gain per day and per month, and eventually per year. Below are some images of the sales spreadsheet.