Why many people don’t know how much they earn
The Sunday Nation
Nairobi,
06 February 2011
Richard is wondering how much he earns. He writes: “My letter of appointment states that the base salary is Sh95,000 which is inclusive [italics by Kihanya] of 20 per cent house rent. Please advice the basis of computation for arriving at the net amount.”
The term “base” or “basic” salary means the amount of money you are being paid for the work you are doing; that is, before adding any allowances or deducting taxes , etc. Therefore, if the Sh95,000 includes 20 per cent house rent, then it cannot be termed “base”.
But if that is the case, then your base salary is Sh79,167. When you add 20 per cent to this, you get the Sh95,000.
However, if it is Sh95,000 plus 20 per cent house rent, you might want to further clarify what the employer means. Is it that they will pay 20 per cent of your rent or that they will add 20 per cent of the basic salary to your payment (i.e., an additional Sh19,000)?
If it is the latter (as I suspect), then your “gross” pay is Sh114,000. The “net” amount is what remains after the statutory deductions have been removed. These are: income tax, pension contributions and health insurance. You payslip will show the amounts against each item.
Now Richard’s case is relatively simple, but business people have a difficult time calculating their profits. I suspect that the majority of them have no idea how much they are making!
It is easy to calculate profit if you are a hawker: every morning you go to your supplier, pick some goods, then you go out to sell them. In the evening, you go back and pay for what you have sold and return what you haven’t.
In that simple transaction, the money left in your pocket is your profit.
But what happens when a hawker “graduates” into a shopkeeper. The challenge in a shop is that it keeps unsold goods. So, one day the keeper might buy 20 loaves of bread but only sell 15 of them. The remaining 5 are not returned to the supplier: they are kept to be sold tomorrow.
Suppose she bought the bread at Sh25 each and sold them at Sh30. At closing time, she will have 5 loaves in stock and Sh900 at hand. Can she argue that the Sh900 is her profit – just like she was doing when she was a hawker?
Of course not! We know that she is making Sh5 on each loaf, so after selling 15 loaves, her profit is only Sh75. And that’s not all: she probably paid some young man Sh20 to help put the loaves up on the shelves. Therefore she made Sh50.
When selling just one product, it is easy to track down the profit; but when the shop grows to sell many different things, the calculation becomes a little more complex. I will try to simplify it next week.
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