Know how much profit you make

It is important to know exactly how much profit you make when you sell something. Many people think when they buy something and then sell it for more than they paid for it that the difference between the two amounts is the profit.

 How much you sell something for must have expenses (including tax you will have to pay) deducted from it to come up with the real amount of profit you make.

Many times children do not understand this concept, because Mum or Dad may not have charged them interest for money that is borrowed or for the cost of petrol if they are helping their child deliver pamphlets for example.

They also need to know the difference between pre-tax profit (profit before tax is paid) and after-tax profit (profit after tax is paid). After tax profit is the “real profit” – the amount you have to spend, invest or give away. Some people make the mistake of giving away money, or investing money they don’t actually have (because they have looked at the bank balance and not taken into account any expenses still to come out of that balance) and wondering why they face difficulties later on.

Be careful about what you say around your children when talking about how much profit you have made from something. For example if you say you bought a house for $100,000 and you sold it for $150,00 so you made $50,000 profit but forget to mention you had to re paint it, carpet it plus the cost of interest you borrowed, then your child is getting a false impression of what profit actually is. Many adults are quick to make it sound like they have made huge profits from something but the truth of it is they didn’t mention what is actually cost them to make the sale. A good question to ask people when they tell you how much profit they have made from something is to ask “is that after all your expenses have been taken out”?

Silbo Systems, conduct money lessons for parents together with their children in small groups. For information contact us.