Bernoulli's principle (The velocity and pressure)

Bernoulli's principle states that as the velocity of a fluid increases, the pressure exerted by that fluid decreases

Its application is wide:

a) Airplanes get  their lift by taking advantage of Bernoulli's principle.

b) Race cars employ Bernoulli's principle to keep their rear wheels on the ground while traveling at high speeds.

The Continuity Equation relates the speed of a fluid moving through a pipe to the cross sectional area of the pipe. It says that as a radius of the pipe decreases the speed of fluid flow must increase and visa-versa. 

In fluid dynamics, Bernoulli's principle argues that for an inviscid flow, increase in speed of  fluid will simultaneously cause a decrease in pressure or a decrease in the fluid's potential energy.Bernoulli's principle is named after the Dutch-Swiss mathematician Daniel Bernoulli who published his principle in his book Hydrodynamica in 1738.

Incompressible flow equation

Bernoulli's equation is sometimes valid for the flow of gases: provided that there is no transfer of kinetic or potential energy from the gas flow to the compression or expansion of the gas. If both the gas pressure and volume change simultaneously, then work will be done on or by the gas. In this case, Bernoulli's equation – in its incompressible flow form – can not be assumed to be valid. However if the gas process is entirely isobaric, or isochoric, then no work is done on or by the gas. According to the gas law, an isobaric (An isobaric process is a thermodynamic process in which the pressure stays constant) or isochoric process is ordinarily the only way to ensure constant density in a gas. Also the gas density will be proportional to the ratio of pressure and absolute temperature, however this ratio will vary upon compression or expansion, no matter what non-zero quantity of heat is added or removed. The only exception is if the net heat transfer is zero, as in a complete thermodynamic cycle, or in an individual isentropic (frictionless adiabatic) process, and even then this reversible process must be reversed, to restore the gas to the original pressure and specific volume, and thus density. Only then is the original, unmodified Bernoulli equation applicable. In this case the equation can be used if the flow speed of the gas is sufficiently below the speed of sound, such that the variation in density of the gas (due to this effect) along each streamline can be ignored. Adiabatic flow at less than Mach 0.3 is generally considered to be slow enough.

In most flows of liquids, and of gases at low Mach number (Ma or M) is the speed of an object moving through air, or any other fluid substance, divided by the speed of sound as it is in that substance for its particular physical conditions, including those of temperature and pressure. It is commonly used to represent the speed of an object when it is traveling close to or above the speed of sound.

where

is the Mach number

is the relative velocity of the source to the medium and

is the speed of sound in the medium

the mass density of a fluid parcel can be considered to be constant, regardless of pressure variations in the flow. For this reason the fluid in such flows can be considered to be incompressible and these flows can be described as incompressible flow. According to Bernoulli's experiments on liquids his equation in its original form is valid only for incompressible flow. A common form of Bernoulli's equation, valid at any arbitrary point along a streamline where gravity is constant, is:

where:

is the fluid flow speed at a point on a streamline,

is the acceleration due to gravity,

is the elevation of the point above a reference plane, with the positive z-direction pointing upward – so in the direction opposite to the gravitational acceleration,

is the pressure at the chosen point, and

is the density of the fluid at all points in the fluid.

For conservative force fields, Bernoulli's equation can be generalized as:

where Ψ is the force potential at the point considered on the streamline. E.g. for the Earth's gravity Ψ = gz.

The following two assumptions must be met for this Bernoulli equation to apply:

• the fluid must be incompressible – even though pressure varies, the density must remain constant along a streamline;
• friction by viscous forces has to be negligible.

By multiplying with the fluid density ρ, equation (A) can be rewritten as:

or:

where:

is dynamic pressure,

is the piezometric head or hydraulic head (the sum of the elevation z and the pressure head) and

is the total pressure (the sum of the static pressure p and dynamic pressure q).

The constant in the Bernoulli equation can be normalized. A common approach is in terms of total head or energy head H:

The above equations suggest there is a flow speed at which pressure is zero, and at even higher speeds the pressure is negative. Most often, gases and liquids are not capable of negative absolute pressure, or even zero pressure, so clearly Bernoulli's equation ceases to be valid before zero pressure is reached. In liquids – when the pressure becomes too low – cavitation occurs. The above equations use a linear relationship between flow speed squared and pressure. At higher flow speeds in gases, or for sound waves in liquid, the changes in mass density become significant so that the assumption of constant density is invalid.

The Real-world application of the Bernoulli's Principle

In modern life there are many observations that can be successfully explained by application of Bernoulli's principle, even though no real fluid is entirely inviscid and a small viscosity often has a large effect on the flow.

• Bernoulli's Principle can be used to calculate the lift force on an airfoil if you know the behavior of the fluid flow in the vicinity of the foil. For example, if the air flowing past the top surface of an aircraft wing is moving faster than the air flowing past the bottom surface then Bernoulli's principle implies that the pressure on the surfaces of the wing will be lower above than below. This pressure difference results in an upwards lift force.Whenever the distribution of speed past the top and bottom surfaces of a wing is known, the lift forces can be calculated  using Bernoulli's equations established by Bernoulli over a century before the first man-made wings were used for the purpose of flight. Bernoulli's principle does not explain why the air flows faster past the top of the wing and slower past the underside.

• The carburetor used in many reciprocating engines contains a venturi to create a region of low pressure to draw fuel into the carburetor and mix it thoroughly with the incoming air. The low pressure in the throat of a venturi can be explained by Bernoulli's principle; in the narrow throat, the air is moving at its fastest speed and therefore it is at its lowest pressure.

• In open-channel hydraulics, a detailed analysis of the Bernoulli theorem and its extension were recently developed. It was proved that the depth-averaged specific energy reaches a minimum in converging accelerating free-surface flow over weirs and flumes. Further, in general, a channel control with minimum specific energy in curvilinear flow is not isolated from water waves, as customary state in open-channel hydraulics.

• The principle also makes it possible for sail-powered craft to travel faster than the wind that propels them . If the wind passing in front of the sail is fast enough to experience a significant reduction in pressure, the sail is pulled forward, in addition to being pushed from behind. Although boats in water must contend with the friction of the water along the hull, ice sailing and land sailing vehicles can travel faster than the wind .

Sources of Information;

Daniel Bernoulli (1738). Hydrodynamica.

Mulley, Raymond (2004). Flow of Industrial Fluids: Theory and Equations.

Hydrodynamica. Britannica Online Encyclopedia. Retrieved 2011-01-28

Examining Operations Management

This is a field of management that relate to overseeing, designing, and redesigning business operations in the production of goods and services. It involves ensuring that business operations are efficient in terms of using as little resources as needed, and effective in terms of meeting customer requirements. It is concerned with managing the process that converts inputs (in the forms of materials, labor, and energy) into outputs (in the form of goods and services). The relationship of operations management to senior management in commercial contexts can be compared to the relationship of line officers to the highest-level senior officers in military science. The highest-level officers shape the strategy and revise it over time, while the line officers make tactical decisions in support of carrying out the strategy. In business as in military affairs, the boundaries between levels are not always distinct; tactical information dynamically informs strategy, and individual people often move between roles over time.

Operations traditionally refers to the production of goods and services separately, although the distinction between these two main types of operations is increasingly difficult to make as manufacturers tend to merge product and service offerings. More generally, operations management aims to increase the content of value-added activities in any given process. Fundamentally, these value-adding creative activities should be aligned with market opportunity (through marketing) for optimal enterprise performance.

Operations management is an area concerned with managing and directing the physical and/or technical functions of a firm or organization, particularly those relating to development, production, and manufacturing. Operations management programs typically include instruction in principles of general management, manufacturing and production systems, plant management, equipment maintenance management, production control, industrial labor relations and skilled trades supervision, strategic manufacturing policy, systems analysis, productivity analysis and cost control, and materials planning.Management, including operations management, is like engineering in that it blends art with applied science. People skills, creativity, rational analysis, and knowledge of technology are all required for success.

Operations management as a process focuses on carefully managing the processes to produce and distribute products and services. Small businesses rarely talk about operations management instead they carry out the activities that management schools typically associate with the phrase "operations management." Major, overall activities often include product creation, development, production and distribution. Related activities include managing purchases, inventory control, quality control, storage, logistics and evaluations. A great deal of focus is on efficiency and effectiveness of processes. Therefore, operations management often includes substantial measurement and analysis of internal processes. Ultimately, the nature of how operations management is carried out in an organization depends very much on the nature of products or services in the organization, for example, retail, manufacturing, wholesale, among others

2007/2008 PEV

The Kenya post election Violence of 2007/2008 will forever remain in the minds of many.Although the inherent causes if the violence are yet to be addressed even today,a relative tranquility has prevailed in the country following African union mediated process through Dr.Kofi Annan....

How to write An Exemplary Business Plan for A Small Business

Preamble

The main purpose of a business plan is to create a written outline that evaluates all aspects of the economic viability of your business venture including a description and analysis of your business prospects. Your business plan can easily be organized into the sixteen Business Plan Sections .Keep in mind that creating a sound business plan is an essential step for a prudent entrepreneur, regardless of the size of the business. This step is too often skipped. Business plans can vary enormously. Libraries and bookstores have books devoted to business plan formats.Your business plan will become your road-map to chart the course of your business. But at the outset you cannot predict all of changing conditions that will surface. So after you have opened for business, it is important that you periodically review and update you plan. 

Why A Serious Entrepreneur Should Prepare A Business Plan


Your business plan is going to be useful because;

1. First , it will define and focus your objective using appropriate information and analysis.
2. You can use it as a selling tool in dealing with important relationships including your lenders, investors and banks.
3. Your business plan can uncover omissions and/or weaknesses in your planning process.
4. You can use the plan to solicit opinions and advice from people, including those in your intended field of business, who will freely give you invaluable advice. Too often, entrepreneurs forge ahead,without the benefit of input from experts who could save them a great deal of wear and tear.   

Avoid The Following  in Your Business Plan
 
Place some reasonable limits on long-term, future projections. (Long-term means over one year.) Better to stick with short-term objectives and modify the plan as your business progresses. Too often, long-range planning becomes meaningless because the reality of your business can be different from your initial concept.
Avoid optimism. In fact, to offset optimism, be extremely conservative in predicting capital requirements, time-lines, sales and profits. Few business plans correctly anticipate how much money and time will be required.
Do not ignore spelling out what your strategies will be in the event of business adversities.
Use simple language in explaining the issues. Make it easy to read and understand.
Don't depend entirely on the uniqueness of your business or even a patented invention. Success comes to those who start businesses with great economics and not necessarily great inventions. 

Business Plan Format

The Business Plan format is a systematic assessment of all the factors critical to your business purpose and goals.

Here are some  topics you can tailor into your plan:  

Vision Statement: This should be a concise outline of your business purpose and goals.  

The People: By far, the most important ingredient for your success will be yourself. Focus on how your prior experiences will be applicable to your new business. Prepare a resume of yourself and one for each person who will be involved with you in starting the business. Be factual and avoid hyperbole. This part of your Business Plan will be read very carefully by those with whom you will be having relationships, including lenders, investors and vendors.However, you cannot be someone who you are not. If you lack the ability to perform a key function, include this in your business plan. For example, if you lack the ability to train staff, include an explanation how you will compensate for this deficiency.  

Your Business Profile: Define and describe your intended business and exactly how you plan to go about it. Try to stay focused on the specialized market you intend to serve.  

Economic Assessment: Provide a complete assessment of the economic environment in which your business will become a part. Explain how your business will be appropriate for the regulatory agencies and demographics with which you will be dealing. If appropriate, provide demographic studies and traffic flow data normally available from local planning departments.

Cash flow assessment: Include a one-year cash flow that will incorporate your capital requirements. Include your assessment of what could go wrong and how you would plan to handle problems and also Include your marketing plan and expansion plans.

Key Six Steps To A Sound Business Plan

Start-up entrepreneurs often have difficulty writing out business plans.However they should follow certain steps to avoid the difficulty.

1. Write out your basic business concept.
2. Gather all the data you can on the feasibility and the specifics of your business concept.
3. Focus and refine your concept based on the data you have compiled.
4. Outline the specifics of your business. Using a "what, where, why, how" approach might be useful.
5. Put your plan into a compelling form so that it will not only give you insights and focus but, at the same time, will become a valuable tool in dealing with business relationships that will be very important to you.
6. Review the sample plans we furnish and download the blank format to a MS Word document. Fill this in as you progress though the course. 

 Your Plan Should Include the Following Necessary Factors

1. A Sound Business Concept: The single most common mistake made by entrepreneurs is not selecting the right business initially. The best way to learn about your prospective business is to work for someone else in that business before beginning your own. There can be a huge gap between your concept of a fine business and reality. 

2. Understanding of Your Market: A good way to test your understanding is to test market your product or service before your start. You think you have a great kite that will capture the imagination of kite fliers throughout the world? Then craft some of them and try selling them first.

3. A Healthy, Growing and Stable Industry: Remember that some of the great inventions of all time, like airplanes and cars, did not result in economic benefit for many of those who tried to exploit these great advances.

4. Capable Management: Look for people you like and admire, who have good ethical values, have complementary skills and are smarter than you. Plan to hire people who have the skills that you lack. Define your unique ability and seek out others who turn your weaknesses into strengths.

5. Able Financial Control: Most entrepreneurs do not come from accounting backgrounds and must go back to school to learn these skills. Would you bet your savings in a game where you don't know how to keep score? People mistakenly do it in business all the time.

6. A Consistent Business Focus: As a rule, people who specialize in a product or service will do better than people who do not specialize. Focus your efforts on something that you can do so well that you will not be competing solely on the basis of price. 

7. A Mindset to Anticipate Change: Don't commit yourself too early. Your first plan should be written in pencil, not in ink. Keep a fluid mindset and be aggressive in making revisions as warranted by changing circumstances and expanding knowledge. 

8. Include Plans for Conducting Business Online:  Consumer and business-to-business online sales are set to expand exponentially in the coming decade, and small retailers can reach an ever-increasing pool of customers. 

Formulate (and Reformulate) Your Business Plan

 

Donald N. Sull, associate professor of management practice at the London Business School, in an article in the MIT Sloan Management Review, offers some practical suggestions on managing inevitable risks while pursuing opportunities. Here is a encapsulation of his suggestions on how to formulate (and reformulate) your business plan:

1. Be flexible early in the process and keep it fluid. Don't commit too early. Expect your first plan to be provisional and subject to revision.
2. Ask yourself if your experience or expertise gives you the right to an opinion on your specific opportunity.
3. Identify your potential deal killers: variables that are likely to prove fatal to the venture.
4. Clearly identify what you see as the key drivers of success. What are you betting on here?
5. Raise money only in sufficient amount to finance the experiment or evaluation you next envision, with a cushion for contingencies.
6. Delay hiring key managers until initial rounds of experimentation have produced a stable business model.
7. At some point, take the plunge and test your product or service on a small scale in the real world through customer research, test marketing, or prototypes.
8. Test and refine your business model before expanding your operations.

Do's and Don'ts  

                     

DO'S

1. Prepare a complete business plan for any business you are considering.
2. Research (use search engines) to find business plans that are available on the Internet.
3. Package your business plan in an attractive kit as a selling tool.
4. Submit your business plan to experts in your intended business for their advice.
5. Spell out your strategies on how you intend to handle adversities.
6. Spell out the strengths and weaknesses of your management team.
7. Include a monthly one-year cash flow projection.
8. Freely and frequently modify your business plans to account for changing conditions.

  DON'TS

1. Be optimistic (on the high side) in estimating future sales.
2. Be optimistic (on the low side) in estimating future costs.
3. Disregard or discount weaknesses in your plan. Spell them out.
4. Stress long-term projections. Better to focus on projections for your first year.
5. Depend entirely on the uniqueness of your business or the success of an invention.
6. Project yourself as someone you're not. Be brutally realistic.
7. Proceed without adequate financial and accounting know-how.
8. Base your business plan on a wonderful concept. Test it first.
9. Skip the step of preparing a business plan before starting. 

After considering all the above you are now set to do a good business plan.Research widely and consult experts so that you come up with a good business plan

How to Raise Funds for Your Small Business ( Start ups and Expansions)

The key to a successful business start up or expansion is how one can secure appropriate financing. Raising capital is the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy. It can be a complex and frustrating process. However, if you are informed and have planned effectively, raising money for your business will not be a painful experience. 

Finding the Money You Need

 

There are several sources one should consider when looking for financing. It is important to consider all of you options available before making that important decision.

1. Personal savings: Most new businesses are started with the primary source of capital coming from savings and other forms of personal resources.
2. Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often money is loaned interest free, or at low interest rate which can be beneficial when getting started.
3. Banks and credit unions: The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is worthwhile and splendid.
4. Venture capital firms: These firms help expanding companies grow in exchange for equity or partial ownership.

Borrowing Money

 

It is said that small business people have a difficult time borrowing money. Banks make money by lending money. However, the inexperience of small business owners in financial matters often prompts many banks to deny loan requests. To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it and how you can pay it back. You must be able to convince your lender that you are a good credit risk. Requesting a loan when you are not properly prepared sends a signal(High Risk) to your lender.

Types of Business Loans

• Short-Term Loans: Short-term loans are paid back in less than 12 months. Types of short-term loans are:
  1. Working-capital loans..
  2. Accounts-receivable loans.
  3. Lines of credit.
• Long-Term Loans: Long-term loans have maturities greater than 12 months ,but usually less than seven years. Real estate and equipment loans can go up to 25 years. Long-term loans are used for major business expansions, purchases of real property, acquisitions and, in some instances, start-up costs. Types of long term loans include:
  1. Equipment.
  2. Commercial mortgages.
  3. Furniture and fixtures.
  4. Vehicles.

How to Write a Loan Proposal

Approval of your loan request depends on how well you present yourself, your business and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal. A good loan proposal will contain the following key elements in regard to your business:

• General Information. Business name, names of principals, PIN  number of each principal /director and the business address, Purpose of the loan: State exactly what the loan will be used for and why it is needed. Amount required: Request the exact amount you need to achieve your purpose. 
• Business Description. History and nature of business: Give details of your business's age, number of employees and current business assets. Ownership structure: Provide details on your company's legal structure.
• Management Profile. Develop a short statement on each principal /director in your business. Provide background, education, experience, skills and accomplishments of each principal/director .
• Market Information. Clearly define your company's products as well as your markets. Identify your competition and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs.
• Financial Information.
  Financial Statements: Provide balance sheets and income statements for the past three years. If you are just starting out, provide a projected balance sheet and income statement.
  Personal financial statement: Prepare a personal financial statement on yourself and other principal owners of the business.
  Collateral: List all collateral you would be willing to pledge as security for the loan

How Your Loan Request Will Be Reviewed

When reviewing a loan request, the lender is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business-credit report from a credit reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues:

• Have you invested savings or personal equity in your business totaling at least 25 to 50 percent of the loan you are requesting? (Remember, a lender or investor will not finance 100 percent of your business.)
• Have a well documented record of credit-worthiness as indicated by your credit report, work history and letters of recommendations.
• Have sufficient experience and training to operate a successful business.
• Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business.
• Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

Njuguna Kimani: Degrees That Are Good Investments

Njuguna Kimani: Degrees That Are Good Investments: "As I was reading for general information, I came across this and thought it worthwhile...Of course this is also reflected in Kenya and othe..."

Njuguna Kimani: Happy New Year 2011

Njuguna Kimani: Happy New Year 2011: "Dear Lord as I usher the new year 2011,I am reminded of what your word tells me;That, I will have trouble in this world, but You also assure..."

Degrees That Are Good Investments

As I was reading for general information, I came across this and thought it worthwhile...Of course this is also reflected in Kenya and other African countries.

Get a degree that will give you a great return on your educational investment - with growth opportunity, job satisfaction, and financial reward

If you bought a stock or made an investment, you would expect a certain rate of return on your money. Right?
A degree is no different. When you invest in your education, you want to be paid back for your time and money with a good job - and a good paycheck.
Will your degree keep on giving?
Read on to discover six degrees that keep on giving - in terms of mid-career salary gains - long after you've gotten that diploma.

Degree #1 - Bachelor's Degree in Business Administration

 
Are you a natural leader? A degree in business administration can hone your communication, decision-making, and problem-solving skills and prepare you as a manager and team-builder. It can also open the doors to a variety of fields and opportunities - many of which pay quite well. From marketing to health care to public relations, employers need people with a good foundation in business administration to fill all kinds of positions.


How it Keeps Giving: According to PayScale's 2010-2011 College Salary Report, the average starting salary for people with business degrees is $41,100. Mid-career salaries for people with business degrees average at $70,600. If you earned the average mid-salary career, you might be making almost $30,000 more per year than your starting salary. Not a bad return on your educational investment.
Related Careers & Salaries:
Public Relations Specialist: $51,000
Corporate Finance Analyst: $73,150
Elementary or Secondary School Administrator: $83,000
Human Resource Manager: $96,000
Marketing Manager: $105,000

Degree #2 - Bachelor's Degree in Health Care Administration

 

According to the U.S. Department of Labor, few industries in the world are expanding as quickly as health care. Want a degree that will prepare you for this fast-growing field? With a degree in health care administration, you'll be able to use your honest desire to help others to provide patients with a positive health care experience - and make a good living doing it.

How it Keeps Giving: According to PayScale, the average starting salary for people with health care administration degrees is $37,700, and mid-career salaries average at $60,800. That's an extra $23,100 per year (on average) you could take to the bank in your mid-career years.
Related Careers & Salaries:
Medical Office Assistant: $28,300
Health Information Technician: $30,610
Health Benefits Specialist: $53,860
Assistant Hospital Manager: $80,240

Degree #3 - Associate's Degree in Paralegal Studies

 
Intrigued by the legal world but not interested in going through law school? A degree in paralegal studies can let you enjoy the satisfaction of being part of the legal system without the three years of law school training. According to the Department of Labor, paralegals are gaining new responsibilities in legal offices and now perform many of the same tasks as lawyers.


How it Keeps Giving: According to PayScale, the average starting salary for people with paralegal studies degrees is $35,100, and mid-career salaries average $51,300.
Related Careers & Salaries:
Paralegal for Employment Services: $50,050
Paralegal for Insurance Carriers: $52,200
Paralegal for the Federal Executive Branch: $58,540

Degree #4 - Bachelor's Degree in Finance

 
Are you fascinated by the world of securities, investing, or personal finance? A degree in finance can prepare you for a number of jobs from stockbroker to auditor to financial advisor. Jobs in finance can be both personally satisfying - helping people plan for retirement, for example - and financially rewarding.


How it Keeps Giving: According to the PayScale report, the average starting salary for people with finance degrees is $47,500 per year, and mid-career salaries average at a sizable $91,500 per year. It doesn't take a finance degree to figure out that those are pretty good returns.
Related Careers & Salaries:
Mortgage Sales Associate: $40,150
Loan Officer: $54,700
Auditor: $59,430
Stock Broker: $68,680
Financial Advisor: $69,050

Degree #5 - Bachelor's Degree in Accounting

 
Certified Public Accountant (CPA) is listed as number 9 on CNN Money's top 100 "Best Jobs In America." Why? If you earned a degree in accounting, you might become one of the CPAs needed in every sector of the economy - from government to private business to non-profit organizations - to make sense of the current economic turmoil and help businesses run smoothly.


How it Keeps Giving: According to PayScale, the average starting salary for people with accounting degrees is $44,600, and mid-career salaries average at $77,500. That means if you made the average salary, for every year you work mid-career you may be able to bring home another $33,100 on top of your starting salary. That's almost like having another breadwinner in your family.
Related Careers & Salaries:
Bookkeeper: $32,510
Staff Accountant: $59,430
Financial Analyst: $73,150

Degree #6 - Bachelor's Degree in Marketing

 
Are you the kind of person who loves persuading and motivating people? Are you in touch with what consumers want? A degree in marketing can prepare you for a fun and satisfying career in marketing or advertising creating campaigns and energizing the public.


How it Keeps Giving: According to the 2010-2011 PayScale report, the average starting salary for people with marketing degrees is $38,600, and mid-career salaries average at $77,300. You can do the math: the average mid-career salary is $38,700 more per year than the average starting salary.
Related Careers & Salaries*:
Marketing Coordinator: $32,261 - $44,819*
Meeting and Convention Planner: $44,260
Marketing Specialist: $35,426 - $51,999*
Marketing Account Manager: $80,220

Unless otherwise noted, all average salary information is provided by the U.S. Department of Labor's Occupational Employment and Wages, May 2008.

*Average salary information from PayScale.com, "Salary Snapshot for Marketing Specialist Jobs"

How to Analyze Profitability of Your Business

It's prudent to note that the most likely reason one starts a business is to generate profits. On this guide we shall difuse several methods for analyzing your company's operations and calculating the profitability of your business.

Before hitting the road you need to watch out the following:

Profitability Ratios

• Gross Profit Margin
• Operating Profit Margin Ratio
• Net Profit Margin Ratio
• Other Common Size Ratios

Break-Even Analysis

Calculating Return on Assets and Return on Investment

Checklist

Resources

What To Expect

 

Most of us start businesses at least in part because of pride of ownership and the satisfaction that comes from being their ones boss. In addition, you certainly also started your business to generate profits. In this guide among the tools to which you will be introduced are profitability ratios, break-even analysis, return on assets and return on investment.

Some of the concepts, we will use to describe them, may be new to you. But we have tried to explain the terminology and concepts as they are introduced. Where appropriate, we have pointed you to additional sources of information.

What You Should Know Before Getting Started

There are a number of ways to measure your company's profits other than just looking at your bank account.Here we introduce three methods of analyzing how well your company is doing:

• Margin (or profitability) ratios
• Break-even analysis (based on revenues and on units sold)
• Return on assets and on investment

Before starting, you or your bookkeeper should prepared an income (or profit and loss) statement for the business. The techniques we will be introducing you below are intended to make your income statement more understandable and meaningful to you. If an income statement has not been prepared, the information below on constructing a common size income statement will not be of relevance, and the data you need for break-even analysis may be missing.

We will look at several aspects of financial ratio analysis. A ratio is simply a comparison between two numbers. If you have won Eight games and lost two, its ratio of wins to losses is eight to two , which is equivalent to a ratio of four to one. In the business field, the most commonly used kind of financial ratios are various comparisons of two numbers from a company's financial statements, such as the ratio of net income to annual sales. A ratio can be written in several different ways:

4:1          3-to-1          4/1          2

In these pages, when a ratio is in the text, it will be written out using the word "to," that is "two to one." If it is in a formula, the slash symbol (/) will be used to indicate division, that is "2/1."

Profitability Ratios

Here are the profitability ratios that small business owners should look at regularly:

• Gross Profit Margin Ratio.
• Operating Profit Margin Ratio.
• Net Profit Margin Ratio.
• Other Common Size Ratios

 We will define each of them as we go along, and  how one can best use them.

The three measurements of profits — gross profit, operating profit and net profit — all come from your company's income statement.

The definition of gross profit, operating profit and net profit.

Gross Profit = Net Sales Minus The Costs Of Goods Sold.
(Net sales = gross sales less any returns and discounts.)

Operating Profit = Gross Profit Minus Selling And Administrative Expenses
(Administrative expenses = salaries, payroll taxes, benefits, rent, utilities, office supplies, insurance, depreciation, etc.)
Operating profit includes all expenses EXCEPT income taxes.

Net Profit = Operating Profit (plus Any Other Income) Minus Any Additional Expenses And Minus Taxes.
Net profit is what is known as "the bottom line."

Each of these three terms is a way of expressing profit when different categories of expense are included. Gross profit is the difference between sales and the costs of goods sold. Operating profit is the difference between sales and the costs of goods sold PLUS selling and administrative expenses. And finally, net profit is the difference between net sales and ALL expenses, including income taxes.

The three ways of expressing profit can each be used to construct what are known as profitability ratios. This is done by dividing each item into net sales and expressing the result as a percentage. For example, if your company had gross sales of KSH 1 million last year, and net profits were KSH50,000, that's a ratio of 50,000/1,000,000 or 5%.

There are several reasons that ratios are expressed as percentages. This makes it easy to compare your company's results at different time periods. It also allows you to compare your company's results with those of your peers or competitors, and with industry "benchmark" ratios

It is easier to discuss these ratios using actual numbers, so we will include the following income statement for the a certain company. Look at line numbers 3, 9, and 14. We will use the Locopus Company's gross profit (line 3), operating Income (line 9) and net income (line 14) numbers to compute the three profitability ratios.

Locopus Company Income Statement
for the period ending December 31, 2010

Item	Ksh
1. Sales	Ksh200,000
2. Cost of goods sold	130,000
3. Gross Profit	70,000
4. Operating expenses:
5.     Selling expenses	22,000
6.     General expenses	10,000
7.     Administrative expenses	4,000
8. Total operating expenses	36,000
9.      Operating income	34,000
10.    Other income	2,500
11.    Interest income	500
12. Income before taxes	36,000
13. Income taxes	1,800
14. Net profit	34,200

Gross Profit Margin Ratio

Gross profit is what is left after the costs of goods sold have been subtracted from net sales. (Cost of goods sold, also called "cost of sales," is the price paid by your company for the products it sold during the period you are looking at. It is the price of the goods, including inventory or raw materials and labor used in production, but it does not include selling or administrative expenses.)

The ratio of gross profit as a percentage of sales is an important indicator of your company's financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future.

Here is the formula to compute the gross profit margin ratio:

Gross Profit Margin Ratio = (gross Profit/sales) X 100

(Multiplying by 100 converts the ratio into a percentage.)

Let's use the income statement data for the Locopus Company and compute the gross margin ratio for the company:

Locopus Company Gross Margin Ratio:

ksh70,000/200,000 = .35

.35 X 100 = 35%

The gross profit margin ratio for the Locopus Company is 35%.

Your company's gross margin is a very important measure of its profitability, because it looks at your company's major inflows and outflows of money: sales (money in) and the costs of goods sold (money out.) It is a real measure of profitability, because it must be high enough to cover costs and provide for profits. Because it is an important barometer, one should monitor it closely.

In general, your company's gross profit margin ratio should be stable. It should not fluctuate much from one period to another, unless the industry your company is in, is undergoing changes which affect the costs of goods sold or your pricing policies. The gross margin is likely to change whenever prices or costs change.

Operating Profit Margin

The operating profit margin is an indicator of your company's earning power from its current operations. This is the core source of your company's cash flow, and an increase in the operating profit margin from one period to the next is considered a sign of a healthy, growing company. (If your company's operating income is not sufficient to generate the cash you need to keep operating, you must find other sources of cash.)

Here is the formula to compute the operating profit margin ratio:

Operating Profit Margin = (operating Income/sales) X 100

Using the income statement data for the Locopus Company, we can compute the following operating profit margin:

Locopus Company Operating Profit Margin Ratio: Ksh 34,000/200,000 = .17
.17 X 100 = 17%
The operating profit margin ratio for the Locopus Company is 17%.

In general, the operating profit margin is an indicator of management skill and operating efficiency. It measures your company's ability to turn sales into pre-tax profits. It is a ratio that you can use to compare your company's competitive position to others in the same industry.

Because it looks at a company's operating income before taxes are subtracted, the operating profit margin is sometimes considered a more objective evaluator than the net profit margin ratio.

Net Profit Margin Ratio

The formula for the net profit margin ratio is as follows:

Net Profit Margin Ratio = (net Income/sales) X 100

Locopus Company Net Profit Margin Ratio: Ksh 34,200/200,000 = .17
.17 x 100 = 17%
The net profit operating margin ratio is 17%.

While the calculation and evaluation of the gross profit margin ratio, the operating profit ratio, and the net profit margin ratio are important, there are many other helpful tools you can use to get real information from the data in your company's income statement.

One of the most useful ways as an owner of a small business is to look at the items listed on the income statement is to see how each one relates to sales. This is done by constructing "common size" ratios for the entire income statement. The phrase "common size ratio" is simple in concept and just as simple to create. You just calculate each line item on the income statement as a percentage of total sales. (Divide each line item by total sales, then multiply each one by 100 to turn it into a percentage.)

For example, cost of goods sold at the Locopus Company were Ksh 70,000, while sales were Ksh 200,000. So the common size ratio for cost of goods sold was 70,000/200,000, or .35. Multiplied by 100, that's 35%.

Here is what a common size income statement looks like for the Locopus Company.

Locopus Company
Common Size Income Statement
for the period ending December 31, 2010

Sales	Ksh 200,000	100%
Cost of goods sold	130,000	65%
Gross Profit	70,000	35%
Operating expenses
Selling expenses	22,000	11%
General expenses	10,000	5%
Administrative expenses	4,000	2%
Total operating expenses	36,000	18%
Operating income	34,000	17%
Other income	2,500	1%
Total income	36,500	18%
Interest expense	500	0%
Income before taxes	36,000	18%
Income taxes	1,800	1%
Net income	34,200	17%

Once operating income and expense data are turned into percentages of sales, you can begin to analyze the profitability of your company more effectively. Look back over the past several periods (years, quarters or months, whatever is appropriate) and you may soon spot changes in the size of some line items' ratios that reflect problems that need fixing or progress that can be enhanced.

It is also very useful to compare your company's common size ratios to those of your competitors, or to peers in your industry. Privately held companies won't let you see their financial statements, but several organizations publish almanacs of key business ratios.  Your accountant or banker may have access to these or other compilations of ratios for your industry.

Common size ratios allow you to begin to make knowledgeable comparisons with past financial statements for your own company and to assess trends — both positive and negative — in your financial statements. They can also be highly informative when you compare them with the ratios of other companies in your industry.

Owners and managers should carefully watch the three most important profitability ratios: gross profit, operating profit, and net profit. The usefulness to you of the other ratios calculated from the income statement will vary depending on the specific line item and the type of business you are in.

One of the most effective way for you to use common size ratios as a management tool is to prepare them on a regular basis (at least quarterly, and monthly is better) and compare the ratios from one period to another. If you put them side by side in a computer spreadsheet, you can easily spot significant positive or negative changes.

The term "break-even analysis" is another phrase which may seem complex, but the concept behind it is actually quite simple.

Remember that break-even is the point at which revenues equal expenses. Until your company reaches break-even, you are generating red ink; your costs for materials, labor, rent and other expenses are greater than your gross revenues. Once you pass the break-even point, revenues exceed expenses. After break-even, a portion of each dollar of sales contributes to profits. It is only when you pass break-even that profits begin to be generated.

Break-even analysis is a simple but effective tool you can use to evaluate the relationship between sales volume, product costs and revenue.

It is certainly useful for you to calculate your company's current break-even point. If your company is profitable you may want to know how much breathing room you have should revenues take a dip. If your company is losing money, knowing the break-even point will tell you how far you are from beginning to turn a profit.

In addition to evaluating your present situation you can, and should, also use break-even analysis for profit planning. We will show you how to calculate a break-even point both for sales and for units sold.

Break-even Analysis For Sales

To calculate the sales break-even point for your business you should have (or be able to estimate) three pieces of information about your business:

• Fixed expenses
• Variable expenses (expressed as a percentage of sales)
• Sales

Using just these three pieces of data, you can perform a break-even analysis for your company. Before we do that, however, let's quickly review the concepts of fixed and variable expenses.

Expenses that are defined as "fixed" do not vary with sales. They are the day-to-day expenses that your business will incur regardless of how sales volume is increasing or decreasing. Some examples of fixed expenses include overhead, administrative costs, rent, salaries, office expenses, and depreciation.

Variable expenses, on the other hand, do vary with sales. Let's say your company makes paper clips by cutting and bending pieces of wire. As you sell more paper clips, you have to buy more wire. The expense for wire varies with your sales. Typical variable expenses include the cost of goods sold (as shown on the income statement) and variable labor costs (like overtime wages or salaries for sales personnel.) Variable expenses will increase and decrease according to sales volume.

Make the best guess you can to divide expenses into the categories of fixed and variable. There are no hard and fast rules for the allocations; it is up to you and your knowledge of the business.

Once you have the three pieces of information — fixed expenses, variable expenses, and sales — you can use the information in conjunction with the following formula for calculating your company's break-even point.

At the break-even point, Sales = Fixed Expenses + Variable Expenses or
S= F + V

As you can see from the formula, sales at the break-even point are equal to expenses. Until sales reach the break-even point no profits can be recorded, but the next sales dollar will contribute to profits.

Now, let's calculate the level sales must reach to achieve break-even. To do it, we will find what percentage current variable expenses are of total sales.

Here is how the owners of the Locopus Company would calculate the break-even point for their business, using data taken from the income statement above. Their first step is to separate fixed costs from variable costs. The Locopus Company's only variable cost is the cost of goods sold. Selling, general, and administrative expenses are all fixed costs. (For your company, the data may not break out so evenly. Just divide fixed and variable costs to the best of your ability.)

For the Locopus Company, the formula — Sales At The Break-even Point = Fixed Expenses + (variable Expenses Expressed as A % Of Sales) — translates into the following:

Sales at the break-even point = 36,000 + .65S

(Fixed expense of 36,000 is calculated based on data from the Locopus Company's income statement: Selling expense = Ksh22,000, General expense = ksh10,000, Administrative expense =Ksh4,000. These expenses total Ksh36,000.)

Variable expense for the Locopus Company is the cost of goods sold as a percentage of sales. Looking at the Locopus Company common size income statement, we see that the cost of goods sold is Ksh130,000, or .65 of sales.

Now we have to solve the equation

S= 36,000 + .65s

where "S" stands for "Sales at the break-even point."

Move the ".65S" to the other side of the equal sign. (As you may remember from algebra class, it becomes a negative .65S when you move it to the other side of the equation.) So now we have, on one side of the equation, 1S minus .65S, as shown below:

1s - .65s = 36,000

or

.35s = 36,000

Now we can easily solve for S (which here stands for "Sales at the break-even point") by dividing .35S into 36,000.

S= Ksh102,857

The Locopus Company is at its break-even point when sales total ksh102,857. The next dollar of sales will include some profit.

Using Break-even Analysis For Profit Planning

Now that we understand how to calculate the break-even point, we can make one small adjustment to the break-even analysis formula so we can do some "what if" planning about profitability. After all, you don't want to just know where you are today in terms of break-even. You almost certainly also want to know how to attain a given amount of profit.

You can easily calculate the amount of sales necessary for a desired amount of net income before taxes. We just revise the formula slightly by adding the amount of net income you want your company to earn, as follows:

Sales At The Break-even Point = Fixed Expenses + Variable Expenses As A Percentage Of Sales + Desired Net Income.

Let's say the owners of the Locopus Company have a goal of, say, Ksh50,000 in net income before taxes, and want to know what level of sales will be required to generate that. They just make the following calculation:

Sales At The Break-even Point = 36,000 + .65s + 50,000

Using our handy high school algebra again, we solve the formula in these steps:

S= 36,000 + .65s + 50,000 S= 86,000 + .65s
1s - .65s = 86,000
.35s = 86,000
S= 245,714

The Locopus Company must generate sales of ksh245,714 to produce a net income before taxes of Ksh50,000.

Use Break-even Analysis To Calculate A Specified Amount Of Net Income For Your Business.

Break-even Analysis For Units Sold

Depending on what kind of business you are in, it is may be useful for you to calculate break-even in terms of the number of units sold as well by revenues. In other words, you want to know the number of units that must be sold to reach the break-even point. This can be calculated using this formula:

Break-even For Units To Be Sold = Fixed Expenses Divided By (unit Sales Price Minus Unit Variable Expenses)

This formula needs two new bits of information: the unit sales price and the unit variable expense.

If you know the sales price for your company's products (for the Locopus Company it is ksh20.00 per unit) you can compute the unit variable expense, using the variable expense as a percentage of sales; we developed that figure earlier in this guide.

For the Locopus Company, the variable expense was .65. So the unit variable sales expense is ksh20 multiplied by .65, which equals ksh13. What this means is that each unit has a variable cost of ksh13.

Plugging the data into the formula, it looks like this:

Break-even for units to be sold = Fixed expenses divided by (Unit sales price minus Unit variable expenses)

Let S = Break-even For Units To Be Sold S= 36,000/(20 - 13)
S= 36,000/7
S= 5,142

The Locopus Company must sell 5,142 units to break even. If it sells only 5,141, it is not yet generating any profits. On the 5,143d unit it sells, part of the revenue from the sale of that unit will contribute to profits.

Calculating Return On Assets And Return On Investment

The final two types of profitability analysis we will discuss in here are:

Return On Assets and
Return On Investment

Return on Assets

You use the return on assets ratio to measure the relationship between the profits your company generates and assets that are being used. You compute it using data from both the income statement and the balance sheet.

Let us use an abridged balance sheet for the Locopus Company to see how these ratios are calculated and used:

Locopus Company
Balance Sheet
For The Year Ending December 31, 2010

Assets
Current Assets	ksh 65,000
Fixed Assets	115,000
Total Assets	180,000
Liabilities
Current Liabilities	40,000
Long-term Liabilities	100,000
Owner's Equity	40,000
Total Liabilities and Assets	180,000

The formula for computing return on assets is as follows:

Return On Assets = Net Income Before Taxes/total Assets X 100

(Multiplying by 100 converts the ratio into a percentage.)

Locopus Company's Return on Assets:

(36,000/180,000) X 100 = 20%

This ratio is useful when you compare the figure for the most recent period with results from earlier periods in your company's history. It can also be very informative when you compare your company's return on assets with the returns generated by other businesses in your industry.

If your company's return on assets ratio is lower than those of other companies, this may indicate that your competitors have found ways to operate more efficiently. If your company's current return on assets is lower than it was a year ago, you should look at what has changed in the way your company is using its resources.

Return on Investment

Return on investment is considered by many people to be the most important profitability ratio. It measures the return on the owner's investment . As small business owner, the return on investment figure can help you decide whether all of your hard work has been worth it. If the return you are receiving on the money invested in your company does not at least equal the return you would receive from a risk-free investment (such as a bank CD), this could be a red flag.

Here is the formula:

Return On Investment = Net Profit Before Tax/net Worth

Return on Investment for the Locopus Company:

36,000/40,000 = .90

Locopus Company return on investment = 90%.

Checklist

We have introduced several different methods of evaluating profitability. Used alone or in combination, they can give a small business owner a good picture of the financial viability of his or her business.

As a management tool, objective profitability measures such as the ones shown here are invaluable tools for financial management. They are also important to the small business owner because these common profitability measures will be used by outsiders, such as bank loan officers, investors, and, even, merger and acquisition specialists, to evaluate the management skill and potential for success of a company.

Profitability Ratios

• Has your gross profit margin been stable over the last few periods? If not, why?
• What common size ratios are most important to your business?
• Did you consult at least one source of compiled financial ratios to evaluate how your ratios compare to others in your industry?

Break-Even Analysis

• Did you include depreciation and overhead as fixed costs?
• Do all the variable costs you listed truly vary with sales volume?

Return On Assets And Return On Investment

• When you calculated return on assets and return on investment, did you use net profit Before tax?
• Is your company producing a return on investment that's acceptable to you, given the resources employed and the rates of interest you could earn on alternative investments?

Resources

Sources Of Information On Profitability Analysis

How to Read and Interpret Financial Statements, American Management Association, 1992.

Budgeting and Finance (First Books for Business) by Peter Engel. (McGraw-Hill, 1996).

The Credit Process: A Guide for Small Business Owners by Tracy L. Penwell. (Federal Reserve Bank of New York, 1994).

Sources Of Information On Financial Ratios

RMA Annual Statement Studies, RMA — The Risk Management Association. Data for 325 lines of business, sorted by asset size and by sales volume to allow comparisons to companies of similar size in the same industry. The "common size" (percentage of total assets or sales) is provided for each balance sheet and income statement item.

Almanac of Business and Industrial Financial Ratios, annual, by Leo Troy. (Prentice-Hall, Inc.). Information for 150 industries on 22 financial categories. Data is usually three years prior to the publication date.

Financial Studies of the Small Business by Karen Goodman. (Financial Research Associates). Focusing on business with capitalizations under ksh1 million, providing financial ratios and other information.