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If I make toy wagons, I have to purchase one wagon body, two axles, and four tires per wagon. I can estimate variable costs at the beginning of the year, but my estimate will not be as precise as was my estimate of fixed costs. The wages you pay production labor, called direct labor, is a variable cost.


It is tied to how many units you produce. Other labor costs, such as the salaries you pay the accounting department, are fixed costs. These indirect labor costs are not tied directly to production levels. If your production increases from 10 widgets per month to 15 widgets per month it is unlikely you would hire an additional accounting clerk.

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Utilities are another cost that is split between fixed and variable costs. Your phone bill, for instance, probably won't change much as production increases or decreases. However, the demand for electrical power and its cost will increase as production lines run longer and lights stay on further into the night because of increased production. When someone pays you, that is income. You may produce more or less than you sell. For instance, if you have widgets in the warehouse when you receive an order for , you only have to produce 50 additional widgets.

If you make widgets for skis, you may make 20 widgets every month during the summer even though you don't sell any, just so you have enough in the warehouse when winter arrives.

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So income is when you actually get paid, not when you make the product you are going to sell. Total income is just the total of all your payments received during the year. The break-even point is the production level where your income for a certain number of units produced equals your fixed costs plus the variable costs for that number of units.

Any sales beyond the break-even point are profit. If you produce 50 units and sell 50 units you will break even. Your costs will equal your income.

Reading: Making a Profit | Introduction to Business

If you sell less than 50, you will have a loss. If you sell more than 50 you will have a profit. To make a profit, you must be able to sell each unit for more than it costs to make, and you must be able to sell it for a price high enough to cover both the variable cost of making it and its share of the fixed costs. This is true whether you are selling widgets, boxcars of apples, dance lessons, or hours of financial consulting.

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When you bill your clients late, they pay you even later. So stop it!

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Send your invoices immediately when someone incurs a debt, and certainly no less frequently than monthly. Talk to your vendors. Your vendors control your payment terms.

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That makes a huge difference in your cash flow. Explain your business plan. Most importantly, always take their calls, even when, especially when, you owe them money. That not only gives you more time to pay—if you need it—but you can earn cash back or other rewards. Christina Stembel, owner of one of my favorite companies — Farmgirl Flowers—uses credit cards to grow her business. But as a small business owner, cash flow management is always top of mind. Take your banker to lunch.

A good business banker can make or break a company. Mine helped save my business at least twice. Time to get one, and a line of credit to access money if times get tough or opportunities arise. Get a free credit report. Get it at only www. Clear up any inaccuracies and keep your personal credit clean. Go after overdue accounts, especially big ones. Make collecting overdue invoices a continual part of your business. Limit the amount of credit you give to any one customer, even large corporations. Set money aside.