Skip to main content
Mathematics LibreTexts

5.0: Introduction

  • Page ID
    22089
  • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

    When a new retail store opens in your neighborhood strip mall, you wonder whether it will still be running six months or a year from now. Do its owners know how much merchandise they have to sell to cover their costs? Will any money be left over to help grow the business?

    While the numbers vary, approximately 15% of new companies in Canada go out of business in their first year of operations. This number rises to 38% by the third year and to a staggering 49% over the first five years.[1] Why do so many new businesses fail? Economic conditions, the fierceness of competition, changing consumer tastes, or even changes in taxes all contribute to the problem, but one of the most common reasons businesses fail is poor tracking of their basic financial numbers.

    So if you want your own business to succeed, you need to understand its financial side. You need to be able to answer questions like the following:

    • How does the money leave the business through costs and expenses?
    • How does the money come into the business through revenue, which is determined by both the price tags on the merchandise and the volume at which that merchandise sells?
    • What is the minimum amount of revenue that is needed to cover the costs?
    • What is the resulting profitability of the business?

    The next three chapters introduce the concepts behind the key numbers in any business.

    • This chapter introduces the global model of the relationship between costs and revenues. It shows the overall cost structure of a business and introduces models for developing total costs and total revenues. It explains how you calculate net income and contribution margins. Armed with all of this knowledge, you can then answer the break-even question: How much does the business need to sell to cover its costs?
    • Chapter 6 explores merchandising, including methods of calculating the cost of an individual product along with setting its associated retail price, and the impact of markup and markdown decisions.
    • Chapter 7 delves into cost elements that the accounting department typically handles, including sales and property taxes, the mathematics of invoicing, and how to handle currency conversions properly.

    References

    1. Eileen Fisher and Rebecca Reuber, The State of Entrepreneurship in Canada: February, 2010, (Ottawa, ON: Small Business and Tourism Branch, Industry Canada), 9, www.ic.gc.ca/eic/site/061.nsf/vwapj/SEC-EEC_eng.pdf/$file/SEC-EEC_eng.pdf.

    Contributors and Attributions


    This page titled 5.0: Introduction is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Jean-Paul Olivier via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.