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Operator I: Read Greenline

lesson · about 3 minutes

Work out Greenline's profit, three possible moves, and a cash squeeze, one case card at a time.

Pen and paper is fine · no calculator needed why?

Opens at level 40. You're level 1. You can read and practice here now.

the idea

Greenline is a made-up office-plant care business. In its base month, 40 customers each pay $500 and each costs $200 to serve; fixed expenses are $6,000. Each customer contributes $300, so contribution is $12,000 and operating profit is $6,000.

Every scenario runs through the same line: customers × (price − variable cost) − fixed costs. Change only what the scenario changes, and compare the result with the base month.

Profit is not cash. Revenue a customer has not paid yet counts in profit, but it sits in receivables until it is collected.

techniques

Same line, new inputs

A price change, a discount, a hire or a change in customers.

Contribution per customer: the scenario's price minus variable cost.
Multiply by the customers the scenario gives, not today's count.
Subtract the fixed costs, plus any hire, once.
Compare with the base profit, not with revenue.

worked example

Example: A cleaning business has 30 customers at $400 a month, $150 variable cost each, $5,000 fixed. Scenario: price rises to $450 and 28 customers stay; costs don't change. What is operating profit?

28 × ($450 − $150) = 28 × $300 = $8,400.
$8,400 − $5,000 = $3,400.
Today's profit: 30 × $250 − $5,000 = $2,500.

Answer: $3,400

Follow the cash

Not every dollar of revenue was collected.

Start from the opening cash.
Add only the cash actually collected.
Subtract the costs actually paid.

worked example

Example: A cleaning business opens the month with $4,000 of cash. It earns $12,000 of revenue but collects only $9,000, and pays all $9,500 of its costs. What is ending cash?

$4,000 + $9,000 − $9,500 = $3,500.
Profit is $2,500, but $3,000 is still owed by customers.

Answer: $3,500

watch out for

Stopping at contribution. Greenline's $12,000 comes before the $6,000 of fixed expenses.
Assuming every customer stays at the new price, or that extra revenue is extra profit.
Forgetting the hire, or counting it twice. Add it to fixed costs once.
Adding the whole profit to opening cash when some revenue was not collected.

practice

Base month operating profit

worked example

Brightside Cleaning (a made-up office cleaning business), one month: 54 customers each pay $350; each customer costs $140 in variable costs; fixed expenses are $15,000. What is monthly operating profit? (Use a minus sign for a loss.)

Answer: -$3,660.00

Revenue 54 × $350 = $18,900; variable costs 54 × $140 = $7,560.
Contribution $18,900 − $7,560 = $11,340; minus fixed $15,000 = −$3,660.

Scenario: raise the price

worked example

Fernhill Pest Control (a made-up pest control service): 48 customers at $350 a month, $160 variable cost per customer, $4,500 fixed. Scenario: price rises to $375 and 41 customers stay; costs don't change. What is operating profit in this scenario?

Answer: $4,315.00

41 × ($375 − $160) = 41 × $215 = $8,815; minus $4,500 fixed = $4,315, versus $4,620 now.
It depends on how many customers really stay.

Scenario: discount to grow

worked example

Northstar IT Support (a made-up IT support business): 54 customers at $700 a month, $270 variable cost per customer, $3,000 fixed, room for 65 customers. Scenario: price falls to $650 and customers grow to 62; costs don't change. What is operating profit in this scenario?

Answer: $20,560.00

62 × ($650 − $270) = 62 × $380 = $23,560; minus $3,000 fixed = $20,560.
Revenue goes from $37,800 to $40,300; profit goes from $20,220 to $20,560.

Scenario: hire and grow

worked example

Greenline (a made-up office-plant care business): 40 customers at $500 a month, $200 variable cost per customer, $6,000 fixed. Scenario: hire a coordinator for $4,000 a month and grow to 50 customers at the same price; variable cost per customer doesn't change. What is operating profit in this scenario?

Answer: $5,000.00

50 × $300 = $15,000; fixed becomes $6,000 + $4,000 = $10,000; profit = $5,000, versus $6,000 now.

Cash stress test

worked example

Fernhill Pest Control (a made-up pest control service): 36 customers at $650 a month, $270 variable cost per customer, $9,500 fixed. Opening cash is $11,000. This month Fernhill Pest Control collects only $11,900 of its $23,400 revenue and pays all $19,220 of its costs. What is ending cash?

Answer: $3,680.00

$11,000 + $11,900 − $19,220 = $3,680.
Operating profit is still $4,180; the other $11,500 of revenue sits in receivables until customers pay.