If you only have a profit margin of 50%, how do you start to scale your business
Might be a silly question and I may have confused myself but say if I have two candles, which cost me $5 to make. I sell those candles for $10 (profit margin of 50%). If I take out $5 from each candle sale to replace that unit, so I make two more candles for $5 each, I’m left with $5 profit – which I need to pay tax with right.
So how do I begin to sell more than 2 candles at a time, assuming the demand is there? It seems like its a never ending cycle. You have 4 candles, you sell 4 candles.
I have a feeling the answer is obvious or I’m looking at this the wrong way. Please help me, my head is spinning.
It’s all about reinvesting in the business. You’re right in your math. So, let’s say you have one candle that costs $5 to make and sells for $10. Let’s also assume that you have to pay 35% in taxes on your profit.
The first thing you’ll have to do is self-fund the business with $5 of your own capital, meaning that you spend five bucks on the materials to make the candle. You make the candle and sell it for $10, and now you’ve been “reimbursed” for your $5, and you have an extra $5, which is profit.
You’re right in that you’ll have to pay the taxes on the $5 profit, which would be $1.75, giving you $3.25 in net profit. However, you’ll still have 8.25 in your hand, since you effectively paid yourself back with the cost of goods sold (where the margin came from). All you have to do is reinvest that $8.25 and you’ll be able to buy 2 candles, and so on.
Hope this helps!