What consumers want:
A Company must do some very important things if it wants to stay in business.
Firstly, it must sell a product or a service that consumers want for example:
do you think someone who makes steam bicycles will stay in business for very long? We all know what will happen to him! The customer or consumers will stay away, and he will lose his money. The reason for is that people do not want steam bicycles.
Remember the consumer is the KING, he decides which product or service is wanted.
What consumers are willing to pay:
Unfortunately, a company cannot stay in business if they do not supply something that the consumers want, but it must also supply-It at a price that they are willing to pay. Of course, this means that the businessperson does not determine the price of an article or service.
If a company wants to stay in business, it has to be able to produce a product or service cheaper than the price which consumers are willing to pay for it. That is, it has to keep its costs lower than its selling price.
Costs:
Costs are firstly those amounts, which must be spend on the product or service up to the time that it is sold and paid for by the consumer. These are the direct costs. For example, the material (locos, winches, ext.) needed to produce tons will be in direct costs.
In the same way, if one is in the mining business, then one can waste a lot of money by breaking tons and leaving it underground. It is very clear that if one wastes the material used for production of an article, then the material costs will be much higher than if one works carefully.
Costs are also all other amounts that a company must spend during its day to day activities. We call these overhead costs.
These include: Rent for example.
Most business needs a building where they can work. This can be a factory or offices. If the building does not belong to the company, then the company will have to pay rent.
What if the building belongs to the company? They will not have to pay rent, but this does not mean that they have no costs as far as the building is concerned. Well, where did the money come from to put up the building? Most companies borrow money for the purpose. They have to pay interest on the borrowed money. The interest therefor is a cost. Then there are also repairs and maintenance. Don’t think that mining equipment never needs fixing in some way or another?
How a company should pay its costs:
Can a company keep on borrowing more money to cover costs? Unfortunately, not. In this respect, a company is just like a person. If you keep buying things by borrowing money from your friends, what do you think will happen? Do you think they will keep on lending money to you if you never repay them? Well, common sense tells us that they will not.
Very soon, you find that nobody will give you any money. There is only one way in which a company can pay its costs and stay in business. It has to sell its products or services. If a company tries to pay its costs by borrowing money all the time, then it will go insolvent or bankrupt.
If a company sells a product or service, it will use the money it receives from the sales to pay its costs. If there is any money left, then this leftover money is called profit.
Can a company always increase prices to cover costs?
What happens if a company’s costs are higher than the money it receives for selling its products or services? Many people think all that the company has to do is to put up its prices. Then, they say, it will receive more money and it can easily pay its costs. Nevertheless, as we should know by now, the Consumer is king. He or she decides what the selling price of an article will be – not the seller. If the company increases its prices to a level which is higher than the consumers think the product or services are worth, then the consumer will change his money vote. He will spend his money at another company, selling cheaper products, or he will keep his money in his pocket.
The fact that we see prices going up around us all the time, is because of inflation, and not because sellers can just put up their prices whenever they want. A Company has to be able to pay all its costs from the money it receives for its products or services. If a company can only pay for part of its costs, it will still go out of business; it will just take a little longer.
The only way to stay in business:
If a company wants to stay in business, it has to keep its costs as low as possible. And it is where the workers, owners, managers and directors have to work together like a team. If they fail to do this, then they will not be able to keep their cost down, and the company will have to close its doors. They will all lose.
The owners will find that they have lost their money, and the workers, managers and directors will find that they have lost their jobs. Other companies with winning teams that do work together and do keep their costs down will be successful. They will stay in business. The money they have to spend on costs will be lower than the money they receive from sales. This company will have a high productivity and low production and low production costs. They will be a winning team where each one of them will benefit.
Cost saving within a business:
Budgets need to be compiled in order to determine the profitability (whether or not the company will make profit) of the business. These budgets have to be adhered to. to ensure that the company does not run at a loss or that it does not go insolvent.
All businesses estimate their income for the year and plan their expenditure around a budget. They have fixed expenses (rent, wages, salaries, etc.)
Businesses are also compelled to stick to their budgets, just as good money managers would. Having a budget also helps us to cut back on spending and saving within the business. If we ensure high productivity and quality within the business, we already ensure huge cost savings.
Let us look at ways of cost saving within a business:
- Increase productivity
- Make everyone aware of quality and improve quality
- Decrease wastage
- Be pro-active in finding ways of improving efficiency
- Decrease absenteeism; absenteeism IS costly and destructive, it reduces output and causes schedules and programs that needs modifying.
- Resolve conflict and avoid unnecessary strikes.
- Decrease the rate of loan applications from the company.
- Purchase technologically advanced equipment to increase productivity.
- Invest in the training of staff. Especially communication skills and problem identification and solving skills.
What is in it for you if you assist in cost saving:
You can share in savings of costs. (MBO) For example, the company introduced a scheme whereby all officials, including office staff receive a bonus if objectives are met
Profit:
What happens to company’s profit?
Profit is the reward companies reap from the high levels of productivity, quality, customer satisfaction, cost saving etc. Because companies make profit, reward systems can be put into place to benefit employers and employees. Companies to ensure that money works for them and to secure future existence in the marketplace also invest profit.
Profit is determined by the following equation:
PROFIT= MARGIN X VOLUME – EXPENSES
Margin: The difference between the price at which each item is sold and the cost of the item. The cost includes raw material, sales commission (if salesman is used) and packaging.
Volume: The number of units sold over a given period of time. The more units sold the higher the profit.
Expenses: Cost like rent. Wages, water and electricity, transport, replacement of machinery, etc. The greater the expenses are, the lower the profit will be. Reducing expenses is one way of achieving a bigger profit.
The profit can therefore be improved in three ways:
- Increasing the margin (by increasing selling price and/or reducing costs).
- Decreasing expenses.
- Increasing volume.
A profit is a sure sign that the company is doing something that the consumers want and are willing to pay for. It shows that the company is of benefit to society. Remember that a company can only make a profit if it can deliver an article at a cost that is lower than the price the consumer is willing to pay.
It is easy to see that if a company can lower its costs, then more will be left over. That means the profit will be higher. Why should the workers be happy about these profits? And if so, what advantage is there to the workers? In most countries, some of the profit will go to the Government.
The part of the profit that the government takes is called company tax. The part of the company’s profit which remains after the government has taken its bite, is called the after-tax profit.
It is the after-tax profit of a company which can be used for other purposes. It is also this profit which allows the company to stay in business, or to grow, or to buy new machines, or to improve the conditions of its workers.
As all business owners know, a company cannot be successful unless it has loyal workers. Therefore, it will be in the self-interest of the owners if some of the profit of the company is used for better working conditions and wages for its workers.
When we look at some of the bigger companies of today, we see that they employee thousands of workers. Some of these companies had very small beginnings. How did they get so big? Well, companies can only grow if they make a profit, and if they use the profit to enlarge the company.
Many workers may still wonder how all this can benefit them. How can the buying of new equipment benefit the worker? What if the workers of the company do not care about the loyalty of their workers? What if they buy equipment and make the company bigger without paying their workers one cent more? Ahhh…. “This is where the beauty of the Free enterprise system comes into play.” A free market is a system where people are not allowed to sue fraud and force against one another.
The main function of the Government is such a system is to see that people do not use force and fraud against one another. In fact, in a free market system, the role of the government is that of a referee which sits on the side-lines. The government does not take part in the game, and its function is mainly to see that the players do not hurt each other.
This means that if a country has a free enterprise system, then an individual, even, when he is greedy, can only act in his own self-interest if, at the same time, he acts in someone else’s self-interest. This someone else can be a worker or a consumer
The importance of profits:
If a company makes a profit, this profit will act as an invitation to other business owners to start the same type of business. New jobs will be created, and wages will go up. Not because the owners of the companies feel sorry for the workers, but because they’re own self-interest will force them to treat their workers well. Those companies who do make high profits but whose owners do not want to increase wages will soon find that they lose their best workers.
So as one can clearly see: profits create jobs and higher wages. Without profits, companies cannot grow. They cannot create new jobs and they cannot pay their workers higher wages.
Those greedy owners of profitable companies, who do not want to share the profits with workers through higher wages and better working conditions, will very soon find that other companies will pay them higher wages.
We have seen that the owners of companies cannot put all the profit of the company into their pockets if they want to stay in business. What actually happens is that the owners of companies put less than half of the profit into their own pockets. The rest of the profit stays in the company that creates bigger prosperity for workers, owners, management and consumers.
The portion of the profit that is shared amongst the owners is called the dividend. if a company says that it has paid a dividend of 120 cents, it means that the company has paid an amount of 120 cents on every share. The shareholder who owns only one share will only receive 120 cents as a dividend, that is. As his share of the profit of the company somebody who owns two shares will receive a dividend of two times 120 cents, or 240 cents, and so on.
The result of unrealistic wage demands:
If the workers want a company to stay in business, they also have to realise what actions are in their self-interest and what actions are not If, for example, they make wage demands which will wipe out a big part of the companies’ profits, then new companies will stay very far away from that type of business. There will be no new employment, and the product or service which the company provides, will not be able to compete with newer and better products. Eventually the company will gradually perform worse in that industry. The greedy worker, like the greedy owner will have eaten the profit that makes a business prosperous.
The MARCAM Asset Manager Ordering System:
All supervisors to undergo a ± 30-minute practical course to familiarise them with the computer ordering system in use on Barberton Mines.
Self test:
Before the MARCAM course, let us play a game and test our knowledge on the prices of items we use every day of our lives. (Within 10% error will be deemed correct)
