HOW DOES YOUR COMPANY MAKE MONEY?

Accelerate your business with these expert tips on "how does your business make money? Analyse and discover this TIP!

Pn order for a business project to be financially viable, it is essential to understand how your business makes money. This can be explained through a simple diagram representing the money-making machine, using the example of a churro shop. When a churro is sold, the selling price P goes into the business and the unit variable cost V comes out. The margin left over (P-V) covers the fixed costs for the month, and as the month progresses the fixed costs are covered until a sales volume is reached from which the business starts to generate profits.

For the business to be profitable, three fundamental aspects need to be met

1. First of all, for each sale the price must exceed the unit variable costs, and the contribution margin must be positive. This means that it is possible to earn the same amount by lowering the price when the customer is very price sensitive. If you are at low capacity, it may be worth lowering prices to grow, whereas if you are at maximum capacity, you should raise the price and reach the maximum price the market will allow with the least drain on scarce resources (the "bottleneck").
2. Secondly, the sales volume to cover all fixed costs and make a profit must be reached. It is necessary to calculate how much needs to be sold to break even, and if the minimum sales volume to be achieved is too high a market share and impossible to reach, then the business is not viable. In this case, you will have to see how you can increase the margin and/or reduce fixed costs.
3. Finally, it is necessary to recover the investment within a reasonable period of time, known as pay back. In startups we talk about KPIs (key performance indicators) and customer acquisition cost (CAC), which are important measures to ensure the economic viability of the business project. In short, understanding how your company makes money is essential to ensure its profitability and long-term economic viability.

How can chatgpt help me understand how a company makes money?

ChatGPT can help you understand how a business makes money by providing detailed information and clear explanations of the different components of the revenue generation and profitability process.

For example, it can answer specific questions on how the selling prices of the company's products or services are set, how variable and fixed costs are calculated, how the contribution margin is determined, how the break-even point is established, how return on investment is measured and how relevant KPIs are identified to measure the company's financial performance.

In addition, thehe Inteligencia Artificial (IA) can provide you with practical examples and case studies to illustrate how the revenue generation process works in different types of businesses and sectors. It can also help you understand how external factors, such as competition, market changes and economic trends, can affect your company's ability to generate revenues and profits.

IN SUMMARY

The Inteligencia Artificial (IA) can provide you with key information and insights into how the process of generating revenue and profitability works in a business, enabling you to make more informed and strategic decisions about your own business or entrepreneurial project.

In order to achieve the desired cost-effectiveness and economic viability (+) of your project, you must understand how your company makes money, and for this it is very practical to understand this simple scheme. We explain the money-making machine with the example of a "churro maker". When you sell a churro you get into the business the selling price P (3 euros), from your business comes out the unit variable cost V (1 euro flour, oil).

The leftover margin (P-V), falls into another container that represents all of your fixed costs for the month (2,000 euros rent, salary of the churro maker). As the days of the month go by, we manage to cover the fixed costs until you reach a sales volume from which your business starts to make a profit.