Everyone is out to make money. More money. And more money. And if you’ve put in some money already, then you’re out to make a profit, plain and simple. Still, one often, if not frequently, makes profit but still doesn’t quite hit jackpot– or put another way, doesn’t feel as comfortable as his see
mingly lesser competitor seemingly making lesser profit.
So that one is eventually made to ask, What matters most in an enterprise? Is there more to a stable, sustainable franchise than profit? How can one truly maximise profit?
To answer the questions and to have a feeling of self-accomplishment, one often suggests numbers: the number of workers employed, of brands marketed, of products and services offered. Yet, as experience (eventually) shows, to keep a business running one needs profit more than numbers– and a certain type of profit at that.
It is (forgivable) conventional wisdom to say that one’s profits increase with the numbers, but is this really true? And more significantly, Is the increase in profit commensurate with (or worthy of) the increase in numbers– with the consequent more salaries and
higher cost of maintenance?
To answer these curiosities, I share the following scenarios with you.
1. I know a farmer who prided himself on having hundreds of pigs– well, that was to put smaller farmers like yours truly in our place. Yet, he did not put things in proper perspective– as the story next shows.
He soon realised that by not being able to care for all those pigs he was running at a loss: his pigs did not grow so well as to sell off at rewarding prices, yet he had to continuously spend so much to keep them alive. Needless to say, in order to limit his perpetual loss, he cut his population to size and sold off most of his pigs– (again) at a loss.
2. A poultry farmer I know was savouring the proceeds from her investment so much that she was tempted to increase her intake, a temptation she readily succumbed to, figuring it was the surest way to get richer. As the story shows, however, it was not the purest way.
Rather than prepare for the swell, she simply got more day-old chicks for her next production set. And as all rash decisions go, everything was well for a while. Well, that was until they out-grew her housing and stopped growing.
There was greater demand for feed and feeding, for attention and cleaning, and for curtailing infections. And as all rash decisions go, an epidemic broke out and her birds were cut to size– at inestimable cost.
3. Every transporter’s dream is to own a fleet. (Yeah, even President Jonathan, though not a transporter, wants to expand The Fleet.) So this transporter I know kept buying more and more trucks in a bid to reach that critical mass that in nuclear studies leads to a chain reaction (of profit).
Unfortunately, each truck has its own demands in terms of acquisition cost, running cost and incident cost: trucks break down, are damaged in accidents, and are abandoned when market demands fall, so that eventually, he started selling them off until he was back right where the profit became enticing– when he had only a few trucks.
Here’s the mathematics.
a. I keep pigs, so I know that they’re probably the most gluttonous – and prolific – of farm animals. They can literarilly eat you into (and beyond) debt. Now if one pig eats 5kg in a day, two will eat about 7.5kg each. You see, competition is an ass (not the animal). So that the more pigs you have, the more feed you need– and by extension, the more money you
spend on feeding.
Now pigs are social animals so that they’re more active (and more destructive) when they’re together. And there goes your feed– and money! So much for numbers!
b. Chicks need plenty of space. And when you attempt to raise 2 000 birds where you raised 1 000, then you attempt to feed chicks that are bent on not growing. Yes, chicks too understand the concept of population density– and overpopulation.
In overcrowding there’s less ventilation and more heat. More heat means more energy expenditure (vant Hoff’s law) which in turn means more food but no growth, less immunity, and more deaths.
c. The reason the transporter increases his fleet is to compete effectively– to increase the probability of one of his trucks clinching that extra spot.
Yet, each trip is laden with risks and costs. So that the more the trips, the more the costs. And if you’ll permit me to speculate, the profit brought in is not commensurate to the total cost of owning and operating that extra truck.
Because more often than not, redundancy sets in: More trucks, more competition. Then the roster sets in. Then you have to settle the man in charge, and then the department in charge.
Multiply those costs by infinity and you quickly realize how the profit plummets.
More numbers…
d. You have 100 pigs and spend 20 000 naira raising each to maturity (for a period of, say, six months). You sell each for 45 000. Then you pay your other bills; electricity, salaries, repairs… and end up with 40 000 per pig. Still good business, right?
e. I have 20 pigs. And because they’re not so many, I avoid salaries (do all the work myself) and my bills become (statistically) insignificant. I spend less on feeding, say, 15000 or less. I attain 45 000 per pig in the same six months as you, or less. Who’s the better businessman?
Analysis…
Cost price = 20 000 x 100 = 2 000 000
Effective selling price = 40 000 x 100 = 4 000 000
Profit = 4 000 000 – 2 000 000 = 2 000 000
f. Cost price = 15 000 x 20 = 300 000
Effective selling price = 45 000 x 20 = 900 000
Profit = 900 000 – 300 000 = 600 000.
My Scenario I farmer-friend has a farm statement just like IV, and prides himself on being the better farmer since he makes more profit than I. Yet, I always suspected that my farm statement, like (e), is superior.
A lot of people would prefer that two-million profit to the six hundred-thousand. Who wouldn’t? But I wouldn’t. And here’s why.
Further analysis…
d. Cost = 2 000 000
Profit = 2 000 000
Profit percent (of cost) = 100%
e. Cost = 300 000
Profit = 600 000
Profit percent = 200%
So I ask again, Who is the better businessman?
In the book Rich Dad, Poor Dad the author(s) explains the reason for taxation as each government (department) having to employ as many people as possible, sacrificing effectiveness on the altar of numbers and political acceptance– and needing more and more money in salaries, allowances and bonuses, and other costs.
The Bible says rather very early on, “Be fruitful and multiply and subdue the [empty] earth”. (One instruction that continues to cripple population control and family planning.) Yes, there is such a point in a business when one has to expand and subdue, but one must only do so insofar the point where profit loses its percent is not reached, for one must not (in)inadvertently subdue profit with numbers or profit percent with shear profit.
Such a point can be calculated– as can the equilibrium point between supply and demand. But such calculations are beyond this scope of this (simplified) article.
The figures used in this article as based on my everyday observations and the active experience, and are put within realistic limits as every practising pig farmer knows.
I’m therefore open to discussions on the (ramifications and implications of the) issue discussed in this article.
