Every business operation has a range of production with its existing asset and labor pool. For the range of production to be effective, determine which asset generates the real money for the company. If your business is service driven, then your production is limited by the knowledge (skillsets) and available hours of your staff.
There is no universal finite set of business principles. In the aggregate, there are over several hundred of them. Many of them are not applicable to every industry, on the contrary, many are specific to a unique business or industry. The best approach to understanding business principles is to look at this in a holistic manner, i.e. overall doctrine down to a few rules specifically designed for that one business.
Mixed costs are a more advanced business concept. Mixed costs refer to a combination of both a fixed and variable component. A common error made by most small business entrepreneurs is the misapplication of the formula. Many small business owners understand the textbook definition but rarely exercise the concept in reality.
The textbook answer defines cost drivers as those factors that determine the overall cost of operations. As an example, in manufacturing the cost drivers may be processing time or number of steps to produce the product. With service, the cost drivers could be the actual ratio of billable to non-billable time.
A part of any information feedback loop is the operating control reports in business. Depending on the nature and financial impact involved, these reports can be daily (Daily Operating Controls or DOC), weekly (Weekly Operating Controls or WOC) and/or monthly (Monthly Operating Controls or MOC) in management reporting. Their value is to inform management of business activity and identify any potential issues that could generate undue financial harm on the business or worse, create an unsafe product or work environment.
One of the basic business concepts is range of production. It means maximizing the capacity (range) of the assets in your operation. When the business operation goes beyond the maximum production range, costs associated with the marginal production generally exceed the revenue generated with the marginal increase. To maximize profit in any business, operate within your range of production.
In every business no matter production or service, there exists a bottleneck. Your job as the owner or manager is to find it and fix the problem. Once this one is found and resolved; move onto the next one. There is always a bottleneck to find and fix. What is important is to find the problem, identify the core issue, and then resolve the bottleneck. This may sound simply, but it takes someone in a position of knowledge and experience to complete this task.
What I learned was that equipment didn’t call in sick, it didn’t back talk me, it never got upset about how much it was paid and it just kept on humming. It was making us money and I didn’t have to deal with personnel issues. Boy, if only all production could be like this. Turn it on and make money.
