Whether you are planning to start an online business or a physical business. Whether you want to sell products or services or anything. You must understand the business before starting it.
“Business is all about fulfilling the needs of people or solving the problem and in reward money is paid, this can be a product or a service”
In this guide, I will try to cover some basic business concepts which will help entrepreneurs, to do their retail business.
I will use an example of opening a shop as a business, you can apply the concept of this physical shop to an online shop too. This is totally based on my 30 years of business experience but I have tried to make it simple for you to understand.
How to Start a Business?
Before starting any business it is important to understand your capabilities whether you have time, skills and money.
If you have enough money to start a business it is not necessary that you will succeed in business, you need to do a proper business plan before starting a business. Let us understand the working to start the retail business.
First of all, before starting the business you need to understand the gap. Whether there is a problem or need for any product or service. If there is a need, then is there anyone already available to fulfill the need? If yes then how many, if no then you will be the first person to start.
Understand the problems and provide the solution, this will be your business. Which is obvious, however understanding the market share and competition is very important.
know your competition and how many competitors are there. You must understand the following;
- What is market Size?
- What will be the market share?
- Who are the competitors?
- Who will be the customers?
Market universe composition
The market universe is composed of two types of oceans.
When you try to sell your products or when you start a business in a big market where the big players are already there, you will not be able to survive. Because big businesses will try to take over your business within a few days. In red ocean you will always have uncertainty. Therfore follow the blue ocean for your business. If I explain, I must say Smart Phone Market is huge and there are various players, if you introduce a new smart phone brand, apple and Samsung will kill you within few days.
Blue ocean is full of opportunities with fewer problems, low risk, and minimum and no competition. Your survival and growth is possible. Blue ocean is huge. You can launch your business or products in this ocean will less risk of failure. Take a unique idea and work hard on it, if the idea is not yet started by anyone then you will be having high chance having a unique business.
Communication is a key skill that will help you to deal with vendors or customers, spoken or written language skill is very important.
Basic Business Accounting
In order to start the retail, you must know at least basic business accounting, the Balance Sheet (Assets, Liabilites, Capital) then Income and Expense Statement and finally profit and loss.
The amout that you invest in your business is called capital and the business considers it a liability. In books, it is mentioned a capital.
Assets and Liabilities
Fixed Assets, Current Assets, Long Term liabilities and so on, look for these terms must be known.
A balance sheet that consists of the Assets and Liabilities, then an income statement or profit and loss statement that consists of all the income less all the expenses, then you get the end result in form of profit or loss. How all this is derived one who starts the business must know this.
This is derived by deducting direct expenses and cost of sale from total sale.
Suppose you purchased a product for US $ 100 from supplier and you incurrend US $ 20 to incurr the expenses to get it to your store these expenses could be shipping charges and the duties that you pay to get the products to your store, all of this is deducted from the sale and the value that you get is Gross Profit. In this scenario supposed you sold the phone for US $ 150.
Gross Profit = Sale – (Purchase + Cost of Sale)
Gross Profit = 150 – (100+20) = 150-120 = 30
The net profit is derived by deducting all the expenses from the gross profit. In the above scenario, your Gross profit is US $ 30 on the sale of one phone, supposed you sold similar 100 phones during the month so your gross profit expected is US $ 3000.
Now let us calculate the Net Profit which is derived as below
Net Profit = Gross Profit – Indirect Expenses
Indirect expenses are all those expenses which are not related to the purchase or production of material.
The indirect expense will be the rent, salaries, marketing expenses, shipment expenses for sales, electricity bills, bank charges, and so on. The total of these expenses will be called indirect expenes, suppose you calculated the expenses and your expenses totaled US $ 3500 during the month. Whether you made a profit or not can be derived as below
Net Profit/Loss = 3,000 (your gross profit) – 3500 (Your expenses)
Net Loss = 500
In above scenario you made the loss.
The reason of expalining this scenario was that most of the individuals who start the business they only consider the Gross Profit and think that they made money, but reality might be differnt. Before starting any business you must know how to calculate the net profit of the business, that is in fact the real profit.
Also note that you must take your salary also from the business then calculate the Net Profit.