Introduction
Last week you began the team project by working out a way for your group to collaborate and get things done. This week, you’ll learn basic business concepts like revenue, profit, and the difference between fixed costs and variable costs. You’ll also learn how to visualize and interpret data. Finally, you'll learn how to make decisions. Applying these lessons can help your group have good material for your final team assignment next week.
Business Basics to Help You Get and Interpret Data
President Dallin H. Oaks shared the following story in his April 2001 conference talk, Focus and Priorities, which comically illustrates why you won’t get ahead if you don’t make more money than you spend.
As unlikely as this scenario may seem, the men in this story were caught in a common business problem—their revenue did not exceed their costs. Just because you sell something does not mean that you are making money. You could be selling at a loss like the two men in the story. In order to make money (earn a profit), you need to sell your product above your cost.
- Revenue is the amount of money that you get when you sell something.
To make a profit, you must understand your costs compared to what you earn. There are two types: fixed costs and variable costs.
- Fixed costs are expenses you pay regardless of sales, like rent or salaries.
- Variable costs, such as gas or maintenance, change based on how much you produce.
Understanding Profit and Loss
Profit depends on revenue, calculated by multiplying the sales price by units sold. For example, if you sold 25 glasses of lemonade at $1 each, your revenue would be $25. To break even, your total costs must match your revenue. This means you've covered costs but haven't made a profit yet. Knowing this helps you decide if your business can cover its costs and hopefully make a profit. If your business does less than break even, your business has a loss.
- Profit is money earned after covering costs.
- Loss means your business does not earn enough revenue to break even or make a profit.
To see how all of this works, watch the following video.
(02:54 mins, Profit and Loss Transcript)
Let’s take a closer look at the break-even chart from the video to review some of the key concepts. This chart shows at what point you sell enough units to pay for your fixed costs.
In this example, the break-even point is around 650 units because that is the point at which the cost lines and revenue lines cross. Graphing your revenue and cost lines are great ways to visualize the profitability of your business model.
While graphing these lines is a great way to visually show profit and loss, what would you do if you needed to find the exact number of units that you need to make to break even? Well, using simple math, you can find that number by dividing your fixed costs by your contribution margin. Remember that your contribution margin is price minus variable costs. So we could write the break-even formula as the following:
\begin{align*}Break\space Even\space Point = \frac{Fixed\space Costs}{Price - Variable\space Costs}\end{align*}
Using this formula, you can quickly calculate how many cups of your drink you’ll need to sell to cover your costs. In our previous example involving lemonade, the exact break-even point is 667 units (500/.75=667). A break-even analysis is just one of many business tools that you can use to calculate the profitability of a business. We’ll talk about other common terms and formulas in the next section.
Understanding Business Terms and Ratios
In business, we use lots of different terms to describe different parts of a business. For the team project, we're going to try to keep it simple. We need to cover a few essential terms though. If you're familiar with business operations, you'll recognize that we've left a few things out. Regardless, the concepts are still sound. Example numbers appear below each term.
- Gross profit is how much money you have left after subtracting your variable costs. It is an important number because gross profit is what you'll use to pay for your fixed costs. It is calculated by subtracting your variable costs from your revenue.
\begin{align*}Sales\space Revenue\space - Variable\space Costs = Gross\space Profit\end{align*}
\begin{align*}$1,300 - $325 = $975\end{align*}
- Net profit is how much money you have left after you pay all of your costs (variable and fixed). Net profit is sometimes called net income or your bottom line because it's how much money you made or lost during a period of time. You calculate net profit by subtracting fixed and variable costs from your revenue. Net profit is a much truer view of your profitability.
\begin{align*}Sales\space Revenue\space - Variable\space Costs\space - Fixed\space Costs = Net\space Profit\end{align*}
\begin{align*}$1,300 - $325 -$500 = $475\end{align*}
- Profit margin is the percentage of how much money you keep. While raw numbers are useful in calculations, financial data is often presented in the form of a ratio to give context to the numbers. If you wanted to compare the profitability of one lemonade business against another, it would be difficult to do by just looking at their net profit. You need to look at the profit margin.
\begin{align*}Profit\space Margin = \frac{Net\space Profit}{Sales\space Revenue}\end{align*}
\begin{align*} 37\% = \frac{$475}{$1,300}\end{align*}
Let’s step back and look at what this all means by viewing this short video.
Answer these questions to see what you remember from reading the text above.
- Revenue is __________.
ANSWER - Paying rent or salaries of employees are examples of __________ costs.
ANSWER - Net profit is calculated by subtracting the __________ and the __________ costs from the revenue.
ANSWER
Making Decisions
Having the right data is good. Interpreting it is good. However, how can you make the best decisions with data and other information? We make decisions each day. Some are of little consequence and others can change our lives. President James E. Faust taught that "the choices we make … determine to a large extent our happiness or our unhappiness, because we have to live with the consequences of our choices. Making perfect choices all of the time is not possible. It just doesn’t happen. But it is possible to make good choices we can live with and grow from. When God’s children live worthy of divine guidance they can become ‘free forever, knowing good from evil; to act for themselves and not to be acted upon’” (Choices, April 2004 general conference).
This week, you will make a data-driven decision in your team project. This will go quickly. However, in a real business situation, just like in life situations, many decisions take time to make. This section will discuss how to access God's help when making decisions and give some decision-making strategies.
In the gospel, agency has a special meaning. It’s not an organization, a business, or an office. It is the ability God gives us “to act for [ourselves] and not to be acted upon” (2 Nephi 2:26). The idea that agency makes us “free to choose” (2 Nephi 2:27) is essential to the plan of salvation. Satan was cast out because he “rebelled against [God], and sought to destroy the agency of man, which I, the Lord God, had given him” (Moses 4:3). God’s gift of agency makes us responsible to make decisions.
Accessing God’s Help When Making Decisions
One of the first things disciple leaders do when facing a difficult decision is to use their agency to study the issues and then ask the Lord if their decision is right. This pattern is illustrated in the following story about Oliver Cowdery.
Oliver Cowdery learned an important lesson about using his agency to make decisions while he was acting as Joseph’s scribe during the translation of the Book of Mormon. Oliver wanted to translate the Book of Mormon the same way Joseph did. Joseph took Oliver’s question to the Lord, and God said that if Oliver was faithful, he could translate. Oliver was excited to start translating, but his hopes were soon dashed. He found himself unable to do it. Frustrated, Oliver asked Joseph why he wasn’t able to do it. Joseph took his question to the Lord who replied, “Behold, you have not understood; you have supposed that I would give it unto you, when you took no thought save it was to ask me” (D&C 9:7).
Oliver was probably feeling a bit confused. He had asked if he could translate; God said he could. What did the Lord mean when he said he took “no thought save it was to ask?” Isn’t asking a key part of being able to use God’s power? What more could he have done? The answer comes in the following verse, “Behold, I say unto you, that you must study it out in your mind; then you must ask me if it be right, and if it is right I will cause that your bosom shall burn within you; therefore, you shall feel that it is right. But if it be not right you shall have no such feelings, but you shall have a stupor of thought that shall cause you to forget the thing which is wrong” (D&C 9:8–9) .
Oliver didn’t understand how much work and preparation it took to translate. He thought that he could just look into the Urim and Thummim and that he’d see the words like Joseph did. He neglected to take into account the level of Joseph’s preparation, which included years of training and humility before he was even entrusted with the plates. There were also instances where Joseph recorded that he wasn’t able to translate after having a disagreement with his wife until he had repented and asked Emma’s forgiveness.
In short, he had to work hard to be worthy of receiving revelations and using the Urim and Thummim. Joseph also endured much tribulation. He even had the plates taken away from him for a time after he entrusted the manuscript to Martin Harris against Heavenly Father’s wishes and the manuscript was subsequently lost. Joseph had invested much and endured much so that he could translate. He had consistently used his agency, his faith, to act rather than be acted upon.
Decision-Making Strategy
As Oliver’s story illustrates, we need to spend time studying the issues related to the decisions that we’re trying to make. But how can we effectively “study it out in our minds"? Good decision-making strategies can help. In this section, we’ll review three strategies that will help you make better decisions, both in your personal and professional life. These three strategies are the following:
- Understand the problem.
- Get the information that you need.
- Make sure that your decision aligns with your values.
Do You Understand the Problem?
The first step in making good decisions is to understand the question or problem that you’re working on. This step forces you to stop and make sure that you’re asking the right questions. After all, if you don’t know what the real problem is, you’ll have a hard time arriving at the right answer.
Quite often, bad decisions can be traced back to incorrect assumptions about the problem. One reason why this happens is that people can be too confident in their own knowledge. They overestimate the likelihood of success and fail to slow down and get the facts. People in this situation are more likely to misidentify the problem and not seek counsel from others. They have, in effect, created the illusion of learning that you studied last semester during the lesson on learning strategies—when the familiarity with something causes one’s brain to check out. The caution here is this: don’t be too quick to make a decision. If you’re feeling confident about a decision, ask yourself, “Am I confident because I’ve thoroughly examined the problem or because I believe I just know?” If you’re relying on your instincts or past experience alone, take time to check your assumptions.
Do You Have The Information That You Need?
Another important strategy of decision-making is gathering information. An essential part of getting at the root of a problem is to know the facts. Good information can help you see things that you might not have considered. Data-driven decisions are especially important in business and financial matters, as you will see in your team project. As you gather data, make sure that it is accurate and relates to the problem that you’re trying to solve.
Keep in mind that you’ll never know everything. You can become overwhelmed by data if you don’t stay focused. You’re likely to get to a point when you have to make the best decision with the facts at your disposal. If you’ve thoroughly examined the problem, considered different points of view, and taken your decision to the Lord, you’ll have done all that you can do. Remember President Faust’s counsel “Making perfect choices all of the time is not possible. It just doesn’t happen. But it is possible to make good choices we can live with and grow from” (Choices)
Does Your Decision Align With Your Values?
The third strategy of effective decision-making is centered on values. Peace and happiness come from making decisions that are aligned with our values. This is why it is critical that we constantly pause and ask ourselves, “Does this decision align with my values?” If our answer is “no,” we should not move forward! We should instead start the process over to make sure that we understand the problem and get all the information that we need to make an informed decision.
Applying Decision-Making Strategies
Think about your team project. This week, you have to decide what price for your drink will attract as many neighbors as possible while also raising as much money as possible for Relief Aid. As you prepare to make that decision, ask yourself the three questions above:
- Do we understand the problem? If you don't really understand what the problem is, review W04 Prepare: Team Project. Simply moving ahead without reviewing the problem may cause you to make a decision that doesn't work as well as it could for you.
- Do we have the information we need? Carefully look at the information provided at W05 Prepare: Team Project. Then, look at the template found at W05 Application Activity: Break-Even Analysis. Nearly all of the information you need are in those two places, but you have to make sure you recognize it and use it.
- Does your decision align with our values? It's likely the answer will be 'yes' given the parameters of the team project, but this is still a good question to ask, especially if you continue applying these strategies in the future.
Enjoying the business aspects of your semester project? If you are interested in creating your own business, see when your local stake is offering the self-reliance course Starting and Growing My Business. You might also want to consider adding a business certificate to your degree plan. For more information, visit the business section of BYU-Pathway's Certificates and Degrees Program List.
Answer these questions to see what you remember from reading the text above.
- According to President James E. Faust, what largely determines our happiness or unhappiness?
ANSWER - What lesson did Oliver Cowdery learn about decision-making while acting as Joseph's scribe during the translation of the Book of Mormon?
ANSWER - The third strategy of effective decision-making is to ensure that your decision aligns with your __________.
ANSWER
W05 Gathering Prep
What will you do this week, in preparation for the gathering, to exemplify the Learning Model principle of “Teach One Another?” If you are confident with using Microsoft Excel, offer to help other groups in your gathering this week. If you do not understand something, ask questions at your gathering. Don’t be afraid to speak up.
After reading this lesson, ponder the following questions. If desired, record your thoughts in a learning journal.
- Why is it important to distinguish between fixed and variable costs?
- Have you ever made a bad decision because you didn’t fully understand the problem? How could you have better diagnosed the problem?
- Why is having data an important part of making good decisions?
- How can making decisions that are not aligned with your values create conflict?
- Career Connection--> Did you know that your performance at work is being measured? In one way or another, your supervisors are taking an account of what you do, and they will use that information to make decisions about your work. Do all that you can to be great at your place of work so that those measuring your performance will see the great value you bring.