I quote the first few paras. of this Reddit comment:

[1.] Imagine you had a business selling lollipops at school. Since you can buy a bag of 100 for \$10, you can sell them for 25¢ a piece for a profit.

[2.] But you don't have \$10. But there is profit to be made for all if people give you the money. So you ask your friends to invest. They each give you \$1 and you give them (and yourself) some stock in the venture - a promise to split the profit. You guys buy a bag, and in one week, you sell all your lollipops for 25¢ each.

[3.] So now you have 0 lollipops and 25¢ x 100 = \$25 Awesome! Maybe you pay yourself a market rate for your job in the venture as salesman (you're also an employee since you sold the pops) - say \$5 So you have \$20 to split 10 ways. Everybody makes \$2 from their \$1 investment - everybody wins. you could pay them back their \$1 investment and another \$1 profit - this extra is called a dividend.

[4.] Now, would your investors go in again next week? Sure! You're doubling their money. And you ran out of lollipops right? So maybe get everyone together to vote and we all agree at a shareholder meeting to skip the dividend and turn the venture into a business that reinvests the profit into 2 bags of lollipops and make money even faster.

[5.] Next week you sell out again. Since you're just one sales guy, you still only cost \$5 and your profit margin has risen. You can now buy 4.5 bags of lollipops each week. Your business is growing!

See para. 5:

  1. how has my profit margin risen? The profit is the same in the sales in 1 and 4?

  2. why can I "buy 4.5 bags of lollipops each week"? Is the author just postulating this? Or does this follow from my 2 sales?


1 Answer 1


The margin with 1 bag was \$25 (revenue) / \$15 (labor + materials), or ~166%. The margin with 2 bags, assuming no additional labor costs, is \$50/$25, or 200%.

When this business plans out expenditures on labor and materials for the third time around, it has \$50 cash, enough to pay $5 for labor and up to of 4.5 bags of candy.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.