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# How To Calculate Gross Profit

One of the most important financial concepts you will need to learn in running your new business.

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The tool that you use to maintain gross profit is mark-up. The gross profit on a product is computed as:

### Sales – Cost of Goods Sold = Profit

Understanding gross profit is all about the distinction between variable and fixed costs.

Variable costs change based on the amount of product being made and are incurred as a direct result of producing the product. Variable costs include:

1. Materials used
2. Direct labour
3. Packaging
4. Freight
5. Plant supervisor salaries
6. Utilities for a plant or a warehouse
7. Depreciation expense on production equipment
8. Machinery.

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Fixed costs are generally more static in nature. They include:

1. Office expenses such as supplies, utilities, a telephone for the office, etc.
2. Salaries and wages of office staff, sales people, officers and owners
3. Payroll taxes and employee benefits
4. Advertising, promo and sales expenses
5. Insurance
6. Auto expenses for sales people
7. Professional fees
8. Rent.

Variable expenses are recorded as cost of goods sold. Fixed expenses are counted as operating expenses (sometimes called selling and general administrative expenses).

While the gross profit is a rand amount, the gross profit margin is expressed as a percentage. It’s equally important to track since it allows you to keep an eye on profitability trends, which is critical as many businesses have got into financial trouble with an increasing gross profit that coincides with a declining gross profit margin. The gross profit margin is computed as follows:

### Gross Profit / Sales = Gross Profit Margin

There are two key ways for you to improve your gross margin. First, you can increase your prices. Second, you can decrease the costs to produce your goods. Of course, both are easier said than done.

An increase in prices can cause sales to drop. If sales drop too far, you may not generate enough gross profit rands to cover operating expenses.

Price increases require a very careful reading of inflationary rates, competitive factors, and basic supply and demand for the product you are producing.

You can increase gross profit margin by lowering the variable costs to produce your product. This can be accomplished by decreasing material costs or making the product more efficiently. Volume discounts are a good way to reduce material costs. The more material you buy from a supplier, the more likely they are to offer you discounts.

Another way to reduce material costs is to find a less costly supplier. However, you might sacrifice quality if the goods purchased are not made as well.

Whatever your business, you should always be on the lookout for ways to deliver your product or service more efficiently.

However, you also must balance efficiency and quality issues to ensure that they do not get out of balance.

### Putting theory into practice

Let’s look at the gross profit of ABC Clothing Pty (Ltd) as an example of the computation of gross profit margin. In Year 1, the sales were R1 million and the gross profit was R250 000, resulting in a gross profit margin of 25% (R250 000/R1 million). In Year 2, sales were R1,5 million and the gross profit was R450 000, resulting in a gross profit margin of 30% (R450 000/R1,5 million).

It’s apparent that ABC Clothing earned not only more gross profit rands in Year 2, but also a higher gross profit margin. The company either raised prices, lowered variable material costs from suppliers or found a way to produce its clothing more efficiently (which usually means fewer labour hours per product produced).

ABC Clothing did a better job in Year 2 of managing its mark-up on the clothing products that it manufactured.

Many business owners often get confused when relating mark-up to gross profit margin. They are first cousins in that both computations deal with the same variables. The difference is that gross profit margin is figured as a percentage of the selling price, while mark-up is figured as a percentage of the seller’s cost.

Financial Fitness Routine for the Entrepreneur

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### Mark-up is computed as follows:

(Selling Price – Cost to Produce) / Cost to Produce = Mark-up Percentage

Let’s compute the mark-up for ABC Clothing for Year 1:

(R1 million – R750 000) / R750 000 = 33,3%

Now, let’s compute mark-up for ABC Clothing in Year 2:

(R1,5 million – R1,05 million) / R1,05 million = 42,9%

While computing mark-up for an entire year is very simple, using this valuable mark-up tool daily to work up price quotes is more complicated. However, it’s even more vital.

Computing mark-up on last year’s numbers helps you understand where you’ve been and gives you a benchmark for success. But computing the mark-up on individual jobs will affect your business going forward and can often make the difference in running a profitable operation.

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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# Making Money Online: 10 South African Entrepreneurs Doing It

You don’t need an eight-to-five job or stacks of capital as the launch-pad to start a business and create your own source of income. Here are 10 entrepreneurs who’ve found some unconventional ways of making money online using common platforms.

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What do you know about making money online using Airbnb, Fiverr, YouTube or Instagram? While the average consumer uses these platforms to share their lives, talent and find holiday pads, a few local entrepreneurs have cashed in on these platforms to start lucrative a online money-making business.

Ten South African Entrepreneurs who are making money online:

# Fintech And Small Business Success: 5 Tips For SA’s Fintech Start-ups

Let’s look at what the future holds and how small businesses can benefit.

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Around the world, the fintech revolution is disrupting our relationship with money, both in our personal and business lives. This global market is expected to be worth \$10,499m by the end of 2018 – and digital payments account for much of this growth. This means it’s an exciting time for small businesses looking to get ahead. Whether they’re fintech developers, users or both, these businesses are putting new technologies to work and benefitting hugely.

South Africa’s small business community, like elsewhere, is embracing fintech with enthusiasm. To make the most of  this energy, new incubators and accelerators are setting up shop across the country. Cape Town, for example, hosted its first ‘Startupbootcamp’ which focused on creating scalable technology solutions for financial services and related industries. At Xero, we recently launched a virtual hackathon to enable South Africa’s technology entrepreneurs to compete with other forward-thinking developers on a global scale.

Against an energetic business landscape, fintech presents an attractive market for SA’s budding entrepreneurs. In today’s competitive business environment, new technologies are key to meeting your target audience’s needs and expectations.

So, how can entrepreneurs take advantage of what fintech promises? Let’s look at what the future holds and how small businesses can benefit.

## Think smart, grow fast

The range of available fintech solutions and tools is vast. However, new technologies alone are not enough to get your business off the ground – and keep it there. Here are five tried and tested tips for small business owners to keep in mind at all times.

Related: Fintech: Fusing Finance And Technology

### 1. Have an idea

Entrepreneurs first need an idea, then a plan supported by realistic goals. Your idea has to be good: ask yourself what you’re going to sell, and why. Once inspiration has struck, subject your idea to some hard scrutiny. Chances are someone else is already doing something similar – which is fine if you can do it better.

### 2. Build a plan

Your business plan is your map. It will help you launch your idea with structure and thought, and guide your company’s progression. You don’t need to stick to your plan like glue: Flexibility is certainly a virtue. A new twist or turn – as long as it’s on the right track – could take the business forward faster.

### 3. Be flexible

Of course, if something isn’t working then don’t be afraid to abandon it and move on. Fear of failure often results in entrepreneurs throwing good money after bad. Know when to scrap an idea, take what you’ve learnt and focus on something new. Remember, there’s no point crying over sunk costs.

When it comes to new ideas, look at what’s old and needs refreshing. Keep a constant eye out for ways to disrupt the status quo and offer people a better way of getting what they need. Even if your business is running smoothly and doing well, if you don’t stay alert, you could lose out on some low-hanging fruit to a competitor.

### 5. Use technology

Startups are typically constrained by limited resources – namely time, money and labour. A solid plan will help allocate your resources effectively. Fintech solutions can provide a strong backbone that helps you enhance your capacity, manage your cash flow better and improve productivity.

Related: 6 Lessons The Founders Of iKhokha Used To Launch An African Fintech Start-up

## The future of fintech in SA

South Africa is fertile ground for fintech. A lack of legacy infrastructure – particularly in outer lying areas – has created a large underbanked rural population hungry for financial services. What’s more, a growing urban middle class is demanding more sophisticated solutions to outdated forms of payment processing.

Fortunately, these demands are not falling on deaf ears. The local tech community is part of a dynamic development ecosystem that is working hard to innovate tools that provide greater financial access. With a clear gap in the market and an eager target audience, the future for fintech developers and users in SA is looking stronger than ever before.

Regardless of what your business offers, where it is based, it’s size or age, it’s time to join the fintech revolution. By embracing relevant solutions, your business will become more agile, efficient, responsive and ultimately, more successful.

# Loan Scams: How To Protect Yourself From Loan Scams

My thoughts are that only if there is a grassroots movement by people affected by these scams to get rid of these unscrupulous marketers, will there be any chance of change.

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The current economic situation we’re experiencing in South Africa has created a strong appetite for credit. Often consumers need to borrow money out of desperation just to help them survive. It is here where scam artists and unscrupulous marketers prey on the public, signing them up for services they do not need, with monthly debit orders adding to their woes.

It’s a tactic that we’re seeing more of these days: A company advertises that they can help you secure a loan, even if you’re blacklisted. They charge you for this ‘service’ and at the same time sign you up for a bundle of monthly paid-for add-ons, hidden away in the Terms and Conditions (T&Cs).

They are doing this despite the fact that it is illegal to advertise loans to those who are blacklisted (according to the National Credit Act), and that a company cannot charge to facilitate a loan (according to National Credit Regulator [NCR]). To make matters worse, in 99% of cases, the applicant is turned down, and now has to continue paying for services that they were unaware of signing up for in the first place.

Related: The Definitive List Of South African Business Incubators For Start-Ups

This is criminal behaviour, but for some reason it does not get acted on by relevant authorities (such as the NCR) which should be protecting consumers. With an estimated one million South Africans being preyed upon like this annually, those who are tasked with watching over the consumer should not shake this responsibility. That’s not to say the marketing industry is blameless – far from it, but without a regulatory body, there’s very little to be done to act on these rogue companies. Even Google benefits from these loan scammers – just type in “bad credit loans” and see how many ads pop into the paid search results.

My advice would be for consumers to be vigilant in managing their financial affairs, especially when it comes to “too good to be believed” offers. Here are some pointers to help consumers protect themselves:

• Never give your bank details to an unknown brand or marketing company that is not your own bank or insurance company.
• ALWAYS read the Terms and Conditions before signing up for anything. Most of these scams work because the extras you sign up for are buried in the T&Cs, making them part of the contract.
• Never agree to pay someone to find you a loan. The service provider is conducting an illegal act, since they cannot charge consumers for loan finding services according to the NCR.
• As difficult as it can be, do not apply for loans if you are blacklisted as there is little chance you will qualify. These scams are run by people who feed off/take advantage of people’s desperation, so rather speak to your bank to get advice about your situation.
• Sites such as Hellopeter are a great resource to check if companies are offering fraudulent services. It will only take a few minutes, but could save you years of problems.

As for what to do if you have fallen victim to these scams, complain in writing to the Credit Ombudsman (ombud@creditombud.org.za) as soon as possible. At this stage, we’ve lost faith in the NCR or the Consumer Protection Act stopping these types of scams. Rather get in touch with Carte Blanche, your local or national newspaper, and note it on Twitter and Facebook. My thoughts are that only if there is a grassroots movement by people affected by these scams to get rid of these unscrupulous marketers, will there be any chance of change.

Related: Seed Capital Funding For South African Start-Up Businesses