Owning a business requires more skill than just creating your product or providing a service. You need to oversee the finances of your company, as well. It’s a key to success.
If you think you’ll be able to run your business without a basic understanding of math, think again!
Here are a few reasons why math is important to running a business.
Why is Math Important?
In order to understand your finances, you need to understand basic business math. It’s necessary for your operations to be profitable and for your record books to be accurate.
If you know how to add, subtract, multiply, divide, round and use percentages and fractions, you understand the minimum you need to price your product and meet your budget.
If math isn’t your strength, find a partner who can take over that role or consider hiring an employee to help.
Calculating Production Costs
Before you even start to formally establish a business, you have to estimate the cost it will be to produce your product or perform your service. You must add all expenses that are associated with the items you need.
Doing this lets you know whether or not you can compete with other companies and sustain your business.
In addition to the cost of materials and machinery, you need to add all the other expenses like shipping, labor, debt interest, storage, and marketing.
The very core of your business plan is a representation of how much you plan on spending on each item.
In order to know for sure that you can operate your business and make enough money to invest, you have to charge enough money for your product. An inaccurate pricing will make your business unable to profit.
Markup is the difference between your merchandise cost and the selling price. This gives you the gross profit.
If your business requires a large markup, you won’t be able to promote in your industry if others can sell their same item for less.
Once you determine your markup, you can calculate the retail price by dividing using percent’s and decimals.
For example, if you’re spending $10 to produce a product and your markup is 35%, you need to subtract .35 from 1, giving you .65, which is 65%. To calculate your product’s price, divide 10 by .65, giving you $15.38 when rounded.
If you want to figure out the net profit for a certain time frame, you will need to subtract returns, costs to produce your item, and the operating expenses from your gross revenue during that time frame. You have to always remember to take discounts, depreciation, and taxes into the revenue.
Calculating your net profit will help you to understand whether or not you are charging enough for your service or product. It will also let you know if you’re making enough money to stay open or grow.
You need to project your future revenue and expenses in order to understand the future financial health of your business. It’s so important to understand how your accounting records reflect a change in future sales.
You can also estimate how much an employee changes revenue, and this will determine whether or not you can go into the hiring process.
If someone you are competing with starts to sell your product cheaper, you might need to calculate how much you need to increase volume in order to decrease price.
You use basic math in business every day to understand how all of these activities and more will change your finances.
Types of Math
Here are a few of the kinds of math it will be beneficial for you to understand as a business owner.
Arithmetic is a part of everyday life for all of us, whether we notice it or not. We’re all always calculating things.
How much are we spending in the grocery store? How many plates do I need at the family dinner?
This is doubly true for people who intend to run their own business.
You’ll need to be able to add, subtract, divide, and multiply numbers to do a number of things. Basic skills will also help you complete your taxes.
If you’re involved in interior design, construction, or architecture, geometry is a must for you. You’ll need to be able to calculate square footage, volume, and perimeter for all of these things.
If you can solve an equation for a variable, you’ll be set for a lot of business equations. If you want to figure out how many shares to sell to reach a certain number, algebra can help!
Graphing can also help you to plan for the future of your business.
Not everyone in business needs to know calculus, so don’t get too worried. But if you work in science, engineering, or math, you surely will.
Calculus is especially useful in making economic projections.
Business Math Courses
Why is math important? By now it should be pretty clear that mathematics is absolutely important to all sorts of businesses at all levels, from start-ups to established ones.
Though there are resources out there to help you, such as this calculator, it’s important to be able to do some of this on your own.
If you aren’t sure about all of this math, you’re not alone! There are plenty of business math courses out there that can help you along.
For more tips and tricks, check out our blog today!