Explaining business to an 8-year-old
Last Sunday, my 8-year-old grand nephew asked me, "What do you do?" In order not to complicate the answer, I answered, "I am a boss."
"The boss of a company?"
"Yes."
"You must be smart," he commented.
"Well, I suppose we need to have some intelligence."
"What do you need the intelligence for?" he asked.
"Well, you know what? This is a very good question, something that none of my staff has ever asked me. Well, let me see... As a boss, I need to do a lot of planning."
"Is it like planning your time?"
"It is quite like that. There are a lot of things to do in a business, and if the boss is to do all that, there is not enough time in a day to get all of them done. So a boss needs to bring in people to help him do the things that need to be done."
"So they will collect pay for working for you?"
"Yes."
"How do you get the money to pay them? Do you have a lot of money?"
"Ha ha!" I laugh. "Not at all! I get the money from selling something."
"So when someone buys your thing, you keep the money?"
"Not all of it."
"How much of it?"
"Well, you see.... we need to make the thing, right? And that needs money too. So some part of what we sell goes to paying the people who help me make the thing."
"The people who work for you?"
"Not really. We have to pay other people to give us the things - called raw materials - to make the thing with."
"So you pay people who give you things with the money that you get when people buy?"
"Yes," I reply. "And then with the rest of the money, I have to share it."
"With those who work with you?"
"Yes, but also for those who don't."
"Why do you need to share your money with people who don't work for you? My mummy does not work for you. Do you pay her too?"
"Well, no. Not her. But I pay those who own the building we work at. This is called rent. Then we pay the people who give us electricity for the lights and computers. And we have to pay them even if people buy our thing or not. This is called fixed cost."
"Why is it fixed?" he asks innocently.
"Well, because even if I don't sell anything, I still need to pay them!"
"That's not fair!" he exclaims innocently.
"Haha! That is why people like to own buildings and offices in Singapore. So they can let other people use them and collect money without needing to make or sell anything! So with whatever money I have left from selling my things, I will keep it to pay the people who work for me."
"So you will have to sell quite a lot of things to pay them, right?"
"Clever boy, you! And that is why I need people to help me at work. The more they work, the more money I can make. And the better I can pay them. And whatever is left over is called profit. That is what we get to keep."
"Do you get to keep a lot?" he asked.
"A lot is a relative term. Do you know what a relative term is?" "No."
"It means you need to compare it with something else. So 10 cents is not a lot of money, right?"
"Yes," he sighed.
"But what if I gave you 10 cents for every 20 cents I have in my wallet. Is that a lot?"
"How much do you have?"
"It does not matter. If I gave you 10 cents for every 20 cents that I have, do you think you will have a lot of money at the end?"
"Could be."
"Yeah, it could really be! So the 10 cents is relative. If you compare it to every 20 cents I have, and it gets to be a large amount."
"So you get to keep a lot of... your profit? Is that what you said?"
"Well done! You remembered the word! High Five!" We slap hands.
"Yes. Profit is what is left over after paying everyone for everything. And it will have to be measured against something, like that 20 cents I mentioned. In this case, it has to be compared with the amount that we sell. If we sell our things for $1, and collect 10 cents profit, this means I have a 10 percent profit margin. Have you learnt percentages in school yet?"
"No. But I heard mommy talk about it."
"Well, if you understand what I am saying here, you will ace your maths when you learn percentages. So the profit margin is the percentage of how much we will earn for each dollar we sell. Earn means what we get to keep after paying all those people."
"Like profits?"
"Yeah, same thing."
"So if your profit margin is high, you make more money?"
"Exactly, clever boy!"
"But what if the people can't sell?"
"Then I have to find someone else to do it for me."
"And what will happen to them?"
"Those who can't sell, you mean?"
"Yes."
"I try to put them on to something else so that they can help me."
"And what if they don't want?"
"Wah... you are asking many good questions, boy. You sure you only 8 years old?"
"Not yet. I will be eight in June."
"You really are a big boy now, eh? Okay.... so they don't want to do something else? Then I suppose I will have to ask them to leave the company."
"So poor thing."
"To them, or to me?" I ask.
"To them."
"Why?"
"Because it is not their fault that they cannot sell. Maybe you are selling a toy that no one wants?"
"Wait! You confirm you not yet 8? Maybe you are, like, 28?"
"Noooo! I am not 28! I'm so small, see?" he giggles, jumping to show his height.
"Well, we don't sell toys. But you have actually nailed the problem with so many companies - selling things that people don't want."
"Are there many companies doing that?" he asks.
"You have no idea, my boy! There are more companies out there selling things that people don't want than companies selling things that people want!"
"Then how do they make...errr... profits?"
"One way is to sell many things. Did you notice how many things the grocery shop we just went to is selling?
"Hundreds!" he shouts.
"Yeah, hundreds! And do you think they sell all of them?"
"No?" he asks tentatively.
"That's right. No. So they will keep less of those that sell less, and more of those that sell more. In the end, they hope to be able to sell enough to make a..."
"Profit!" he chimes in.
"Haha! Yes....profits!"
"So is that what you do as a boss?" "Let's see... I find things to sell to people, so that I can make a profit. I need to know who wants what, and whether I can sell it to them. I then find the people who can help me make the things to sell. After that, I bring in people to help me sell them so that I can make enough money to pay all the people who help me make them. Then with whatever is left over, I pay the people who work for me, hoping that there is some...."
"Profit!" he shouts.
"Yeah profit. And I will need to maintain enough of the things to sell so that I will not lose each day of selling, but not too much that would eat up my money. And every month, I will have to make sure that my people are happy doing what they are doing, all the while adding more things for them to sell. So yes. That is what I have to do as a boss."
"I think that is too much work. I don't think I will want to be a boss!"
I laugh the heartiest laugh!
"You are the smartest not-yet 8 year old that I know!"