Theory question : time vs. profit? I guess?

Discussion in 'Growing and Managing a Business' started by iaccidentally, Jun 12, 2013.

  1. iaccidentally

    iaccidentally
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    First, hello!! new member here. I have tried to search the web for the answer but apparently I don't know the correct terms to search for... SO I'm hoping so real people can help.

    As the title suggests, I am looking for a business theory or idea, something I can look into more and/or some kind of general formula I can apply day to day.

    Example:
    Lets say I have a thing. And with 1 hour of work and nothing else invested I can sell that thing for $150.
    Now lets say I have that same thing, and with a $30 investment, 1 week delay, and 4 hours of work, I can then sell it for $250.


    I am looking for the theory and/or calculation to help me determine if of if not I should invest the $30 & extra time.
    PLEASE know that this is just a simple example. I do the work (but I will apply it to other works as well), the items, initial costs, investment costs, time I could invest into the project, etc.. they vary project by project so no one single answer would be correct. That is why I am looking to study up on whatever this is called.

    I sure hope I made myself clear.
    And thanks.
     
  2. Fergal

    Fergal
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    In that example you are making a profit of $150 for one hour of work.

    In this case you are making a profit of $220 ($250 - $30) for four hours work, i.e. $55 per hour.

    You don't make as much per hour in the second example. Hence, if you can repeat what you are doing in the first example, again and again, you would be better off spending your time on that, because it earns you more per hour worked.

    Does that answer your question?
     
  3. iaccidentally

    iaccidentally
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    Thank you Fergal.. That does help.

    So I guess there is no standard formula or template, just sit down and calculate time and profit like you did above. I will take extra time and do that.


    I feel like its very basic question I am asking, but whole company where I work has this problem. wasted time for little to no extra benefit - actually I think sometimes the more time invested into something the less and less money we make, and example above shows it, I am sad to say.
    I want to change it, but i need to know what I am talking about before I discuss matter with ownership.

    I appreciate your input!
     
  4. ArcSine

    ArcSine
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    The basic concepts your post touches on are subsumed by the topics of opportunity cost (of labor) and cost of capital. Very briefly, OC covers the notion that when you choose to spend your time a certain way, you are forgoing the value you'd have received by instead spending those same hours in the next best alternative manner. COC is, in a sense, the notion of opp'y cost applied to money: If you choose to invest your money in a certain way, you are forfeiting the earnings you could have obtained investing it elsewhere, and the forfeited earnings are the "cost" of choosing the particular investment you did. Hence your investment choice is net-profitable only if its earnings exceeds the cost of capital of the invested funds.

    Google these terms and/or spend some time with a Microecon text (where these concepts are developed at length) if you want to explore these fundamental ideas further. Also Google (or look up in the index of that text) marginal analysis, a concept closely related to opportunity cost, and one which might be relevant to the example you posted. Again very roughly, marginal analysis says, "I am presently at Point A. But by investing a bit more labor and/or capital I could move myself to Point B. Now, will the incremental benefits of B vs. A at least compensate for the incremental costs I incur in moving from A to B?"

    You could apply these related concepts to your hypothetical as follows: Choosing the second alternative means you incur these incremental costs...
    • forfeit the immediate receipt of $150
    • give up an additional $30 out of your pocket
    • allocate an additional 3 hours of your time, thereby forfeiting the value of the next-best alternative available to you

    In exchange for these incremental costs you receive $250 a week from now. Good move or not? Maybe, maybe not.

    Suppose you can invest your money at 7% a year (your cost of capital) and, except for these jobs, the best you can do with your time is earn $15 an hour (your opportunity cost). So suppose further you take the first job instead of the second (assuming they're mutually exclusive). You collect your $150. You also work those additional three hours elsewhere for a total of $45. Now along with the $30 you didn't invest in the second job, you have 150 + 45 + 30 = 225 to invest right away. At 7% p.a., after one week you cash out your investment for around $225.30 (i.e., 225 would earn around 30¢ interest over a one-week stretch).

    $250 a week from now beats $225.30 a week from now (and you've worked 4 hours and given up the "thing" either way) so you'd have been better off taking the second alternative.

    Note, though, that if your hypothetical example represents jobs or opportunities which are repeatable, the same analysis might render a different result. Can't give a hard answer on the basis of the furnished info because a key piece of data is omitted: your cost of the "thing". In my earlier marginal analysis your purchase/build cost of the item cancels out and falls away in the process of considering only marginal or incremental costs and benefits, and hence has no bearing on the answer.

    But if we're considering repeatable projects, one in which you buy, work on, and sell one unit of the "thing" every hour, versus one in which you buy, work on, and sell one unit every four hours, then your raw material / assembly cost for the item becomes very relevant in the analysis.

    Suppose for example each unit of the thing costs you $140 to buy / assemble / whatever. With the first type of job (buy, work on, and sell for $150 one unit per hour), an 8-hour day yields revenues of $1,200 against costs of $1,120 (8 units) in exchange for your 8 hours' labor.

    For the second type of job (buy, work on for 4 hours, spend an additional 30 bucks on, and sell for $250 one unit every four hours) that same 8-hour day yields revenue of $500 against costs of $340 for your same 8 hours. (I'm disregarding the one-week delay factor, as we've seen that the interest for a week is negligible.)

    The second type of job wins this one, but I'll leave it to you to rerun the numbers assuming each unit only cost you $100 to buy or build.

    The takeaway is that if these two jobs are mutually exclusive and non-repeating, then marginal analysis says the winner depends largely on the opportunity cost of your time. In a repeating / recurring job scenario, your acquisition cost of the units becomes important.
     
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    #4 ArcSine, Jun 12, 2013
    Last edited: Jun 12, 2013
  5. TimeRider

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    I think the things you mentioned really doesn't happen in real life Business. You don't earn that much on hourly basis or like in 4 hours or on the time mentioned. The best way a Business can survive is through is by profit not by time and how reputed a company becomes for me. What's the use when you have a old reputed company but you have no Profit or enough customers? But what if you have few customers and you are making handsome profit for life time?

    Try to seek Profit but also try to make some regular customers so your business goes on. For this you need much activity in your company like you provide Reliable and Quick Help and support to your customers. Let's take example of the Hosting Services company Hostgator, the only thing that's keeping this company alive is the quick and reliable help and support it is providing to it's customers. And you know that here are lots of companies out there like this who even provide Hosting services for even lower prices and they have best equipments too.

    I think this can little clarify you.
     
  6. iaccidentally

    iaccidentally
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    wow.. needless to say, I need some time to absorb this information.

    outstanding.. ty

    will return when comfortable with this.
     
  7. Rocky

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    If I have understood your question correctly then what you need to know is You sell a thing for $150 after an hour of work but you can sell at $250 with a $30 investment, 1 week delay, and 4 hours of work?

    What I need to know is is there any cap on how much you can sell with each way? Or in a day? Are the numbers correct and in proportion?

    If yes, then I would ask a simple question to answer your question. If you can sell for $150 in an hour then you can sell for $300 after two hours of work? Then why invest $30, wait for a week and work for 4 hours? and still get $50 less for the same thing?
     
  8. LordRoco

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    I would go with example no 1. Irrespective of all the calculations done, I think the first option is much better because of the fact that you dont have to invest much work. The physical investment is relatively low and monetary investment is exceptionally less. Also, it would be much better to opt the first option if you can work along with your first option in order to bring out some extra money. surely, a little more than your expectation wont hurt.
     
  9. iaccidentally

    iaccidentally
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    Yes, these numbers were taken from the project I was working on at that time.
    No, there is not a continuous supply of the same project. (but there is always something to do!)
    The items change all the time, and thus, so does the money. that is why I was looking for more of a calculation... to take the guess work out of trying to figure out how much effort to put into something vs. profit for the business (thus my paycheck!) :)


    after reading about some of the points brought up by arcsine, I made a spreadsheet.. I think the formulas are correct and will now be using that if there is any question on a project.

    Outstanding community you have here! I appreciate everyone's input. TY!



    p.s. - I think what it boiled down to was estimating the potential profit of the hours not worked in example 1 (by doing a new project instead of working longer on the existing project). It is difficult to estimate since it is unknown, but going by averages, I can use that to determine if more or less profit will be made depending on which course of action I take. Gosh i hope that make sense.
     
  10. ArcSine

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    A nice choice of weapon for a project like this.

    From some of your follow up posts I can see that your scenario involves a recurring flow of ongoing projects; not always the same type of project recycling over and over but rather a more-or-less continuous stream of alternative projects, creating a stream of decision points on how to best spend the next X hours in order to get the biggest profit bang for the buck.

    That being the case, one approach is to reduce everything to some common denominator---such as net profit per hour---which puts all alternative project choices onto an apples-vs-apples comparison criterion. If the nature of your projects makes this feasible then this approach lends itself well to a pretty simple spreadsheet model, making it easy to evaluate and compare alternatives nearly at a glance (or at least after punching a few variables into the spreadsheet).

    Staying with your first hypothetical as the illustration, you had two alternate opportunities: one involves working for an hour on some existing unit of "widget", creating, say, a "standard" model which sells for 150; the other is to spend another $30 and four hours of labor to create a "deluxe" model that sells for $250.

    The one variable you didn't mention is the cost of each "widget"; i.e., raw material or purchase price. Let's call your input cost of one widget "X".

    Evaluating the two alternatives on the apples:apples criterion of profit-per-hour:
    • A standard model's PPH is 150 - X.
    • A deluxe model's PPH is (250 - X - 30) / 4.

    As a side note, it follows from this layout that the deluxe model gives the superior PPH as long as X is greater than $126.67. For X = 126.67 you're indifferent between the two (assuming you could spend the next four hours either knocking out four standard models or one deluxe); for X < 126.67 the standard model delivers the better PPH.

    Anyway, you get the idea. Set up your spreadsheet model so that all the key variables of the alternative projects are the spreadsheet's inputs, and the spreadsheet then returns the PPH for any given set of input variables. Then all projects can be instantly compared on the common yardstick of profit per hour.

    Be sure to provide for all significant cost differences between project types in your model. For example if you have to pay somebody a little more per hour to assemble a deluxe finished unit than to make a standard unit, that would have to be incorporated into the number-crunching as well.
     
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  11. AnushaJain

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    I think 1st option is much better because you are getting more money in less time.But in the 2nd case you have to invest extra money along with 4hrs,that is not thye profitable one.
     
  12. platnumcn

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    I would always prefer the second option. I know the profit margin comes in quite low in that. However, I consider that such business plans last for a longer period as well. 150 dollars for 1 hour work and no investment is amazing, but does it work all the time? What is its time span, how long will it last? There are a lot more questions, from where this is coming. However, I believe when it comes to a more feasible option, I would like to opt for the 30 dollar investment and four hours of work. Its just my way of looking at it. I know others have their point well supported, but my thing is that there are high chances of the second one to last for a longer period.
     
  13. DogwoodGroupInc

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    In my opinion, the most money you'll ever make is when you close a deal. The truly rich really don't look at hours as much as the deal. You might build a website that isn't making any money for the first three years but it has a large user base, some billionaire comes a long and offers you millions for it. So all of those hours really came down to one deal.
     
  14. rourkem

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    Well said Dogwood. It's all about marketing and tactic. On how your product is pitch that starts everything else. [​IMG]
     

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