The key knowledge components when running a business.

PROFIT.

This is the key knowledge component. You need to know that SALES - COSTS = PROFIT.

Often when people start up they do not separate their personal business from their business business. For example they would use their car as the business delivery vehicle or their bedroom as their office. They therfore do not accurately calculate the cost of doing business, since the cost is carried by them personally!

One of the first thing a professional business person does is to accurately record the costs and income of a business so as to be able to take informed business decisions. Does my cash flow allow for a particular expenditure? Am I making sufficient profit to be able to finance the purchase of a new piece of equipment. Should I lease or buy?

The first separation of types of costs that you need to make is between Gross Profit and Net Profit. The calculation of your Gross Profit is where you take your sales and deduct your direct expenses from it. What is left is the used to help cover your overheads. If there is anything left after that you have made a Net Profit (but remember you haven't paid your taxes yet!

When you start understanding this simple tool you are well on your way in understanding what is meant by Indirect Costs (Fixed) and Direct costs (Variable) and the Income Statement.

Once you are familiar with calculating the cost of sales of your business you will have a tool in your hand to steer your business and make informed pricing and spending decisions.