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Is Your Business Profitable? Here’s How To Tell - Carol Evenson - Blog

Is Your Business Profitable? Here’s How To Tell

People go into business for many reasons, from helping the planet to changing the status quo. What they all have in common is that they typically want to generate profit. Businesses will want to do what they can to generate profit, so the numbers should reflect this accordingly. How much profit does your business generate? There are several ways to figure out how well your business is doing. Using some simple calculations, you can quickly figure out your financial position. Here's what you can do to figure it out.


  1. Canvas Your Operating Expenses

Operating expenses are at the core of every business. "It takes money to make money," which is relevant for growing companies. Most businesses will have their fair share of expenses prior to generating any profit.

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Optimally, it would be best to keep operating expenses low while maintaining high sale prices. This leaves you plenty of room to account for any emergency expenses and to have extra investment capital. A reliable sales pipeline can keep your business running and your customers happy. In some cases, your operating expenses can exceed that of your incoming profits. If this happens, then you'll need to make changes in order to make ends meet or to increase your profit margins. Please note that not all expenses can be reduced or removed. You can do what you can to reduce as many expenses as possible, but there will be a point where cutting costs can adversely affect the quality of your services if they can still be offered at all. Keep an eye on your main product or service when working with costs so that your business can keep flourishing for years to come.


  1. Perform a Break-Even Analysis

Does it seem like your business is making more money, but there doesn't seem to be any profit? You may be at the "break-even" point, a common position for new businesses and businesses making big changes. If your incoming revenue and your outgoing expenses are at the same level, then you are considered to be breaking even. Although breaking even isn't necessarily a bad thing (because you're not necessarily losing anything), it does defeat the purpose of doing business in the first place, which is to generate profit. If you do find yourself at this level, then it's time to make some changes to set your business up for big profits, rather than to break even. A simple way to calculate the break-even point is with this formula:

Business expenses = Breaking-even revenue

The business expenses include both variable and fixed expenses.


  1. Calculate Gross Profit Margin Ratio

Your gross profit is the number you get by subtracting the cost of goods from the sale amount. This is a good "raw" number to take into account. In general, you'll want this to be a positive number, rather than a negative one. Take it a step further to calculate the gross profit margin ratio:

(Gross Profit / Total Income) x 100 = Gross Profit Margin Ratio

A high ratio means that you’re profiting. A small ratio means that you're nearing the break-even point. Try to increase the ratio by making adjustments in your business. A stable ratio signifies stable business operations.


  1. Confirm Net Profit Margin Ratio

Similar to the gross profit margin ratio, the net profit margin ratio takes into account government taxes. This is the number you get after deducting taxes. You may calculate the net profit margin ratio using this formula:

(Net Income / Total Income) x 100 = Net Profit Margin Ratio

It's important to calculate this number because this is the realistic amount that you can get from your business.


Is Your Business Profitable?

You may wonder how much profit your business is taking in, or perhaps how much it's losing. It's important to know these numbers in order to be better able to manage your finances and to plan for future expenses such as investments. These methods for calculating business profits can help you understand the bigger picture. If you haven't already, get your finances in order with these tips.

Publish Date: October 24, 2021 3:28 PM

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