Monday, June 30, 2008

revenues and cost of earnings

In an interview potential employers generally mentions a gross remuneration packet for its potential employees.

These statements usually are gross amounts.
That is a sum total including taxes, insurance, social security, etc.
The employee would never see a good 30%-45% of that income, but he will be fed that amount. In case of doctors I hear its worse here in the US, a good 60% of the gross earnings would be just liability insurance coverage, then taxes but they will also be fed a gross amount - a large portion of which does not constitute to an expendable income.

If you ask the owner of a business enterprise how much he earns he would not be quoting the revenue of his company. He would rather give you a net figure. A figure that is net of costs and expenses, he would rather look at the the figure that he/she has in his pocked to expend than what his company revenues are.

When the owner tries to sell his business products, the sale price is usually a net figure, a cost of goods with profits but not including taxes, insurance and transportation.

Why would an owner a of business look at his own earnings in net terms, his business products in net terms in contrast to his employees in gross terms?

Gross earnings of an employee are a cost to the owner or an employer.
The entire income statement of an employee is an expense statement for the employer, it matters little to an employer that an employee does not see 30%-40% of that money as the owner of a business has to continue to shell out that additional 30%-40% as a part of the expense for his employees.

Net prices of a business product are a cost to the owner, the rest of the cost that is taxes, insurance and transportation are a cost that the owner passes on to the customer. The owner does not bear that cost, we as customers do.

What in effect an owner communicates is, the cost of his earnings on a per employee basis (remuneration of an employee) or an a per product basis(cost of a product).

For an owner the presence of assets such as office, goods, vehicles, etc in a business are cost of earnings. While for the lay man they are assets. They are costs that he bears at the reduction of earnings.

Its about managing how much to give away of earnings such that the give away creates value greater than earnings in hand. The more the owner expends the lower earnings he has. Which in effect means the cost of earnings are higher than what one is actually earning. Also know as profligate expense!
Fancy set ups are a cost, and communicate a higher costs which is being passed onto the customer where ever possible.
But if the owner manages the expenses right, these expenses can create value for the business thereby increasing his earnings.
Which is the second part of earnings - cash flow - how to manage cash flows.

So the first aspect is looking at cost of earnings and the second part is managing cash flows. The first is perspective the second is empirical experience.

No comments: