How to Know If a Business Is Profitable

One of the most prominent questions asked by business owners is “how profitable am I?”. From there, business owners might also ask “how can I be more profitable?”

Full-time business owners often work more than a traditional full-time working week. They may also take their work home with them. They may think, live and breathe their business. It is natural to want to know how well your business is doing financially. It is also natural to want to be well-remunerated for your business initiatives.

Ideally, your business should be increasing in profitability from one week to the next, from one month to the next, from one quarter to the next and from one year to the next. However, if your business is in a cyclical industry, you may find the cycles experienced at industry level are also being experienced within your business.

This article helps you answer how profitable your business is and how can you increase its profitability.

Q1: How Profitable Am I?

Depending on how long you have been running your own business, you may choose to examine your financial records on a weekly, monthly, quarterly or annual basis.

Irrespective of your period of analysis, you will need to consider two sets of figures: Your business revenues (income) over the period of analysis and your business expenses over the same period of analysis. Your revenue less your expenses reflect your profit over the same period.

When revenues exceed expenses, your business is profitable. When your revenues are equal to your expenses, your business is breaking even. Finally, when your revenues are less than your expenses, your business is running at a financial loss.

Q2: How Can I Be More Profitable?

While the first question is focused on the business’ past, the second question focuses on the business’ future.

There are three levers that can be used to increase profitability going forward.

Lever 1

The first lever you can utilise to increase profitability is the selling price for goods and services. By increasing your selling price, with all other business factors constant, you have automatically increased profitability going forward.

In considering how much you can sustainably increase your goods and services without losing any sales, you will need to know how willing customers would be to pay the increased prices for your goods and services. If your customers are focused on price, you may find less room to increase your selling price than if customers are focused on the calibre of goods and services received.

Lever 2

The second lever you can utilise to increase profitability is to increase the number of goods or services sold. In order to sell more goods or services, you will need to reach new customers or increase the frequency in which you serve your existing customers. The former involves greater marketing initiatives to reach new customers while the latter may involve greater marketing initiatives with existing customers.

Lever 3

The final lever you can utilise to increase profitability involves decreasing business expenses. You can consider which of the business expenses directly or indirectly contribute to earning the business income and which are superfluous. For those that are indeed necessary, you can consider whether there are more efficient or more effective ways of accomplishing the same purpose. By reducing the expense side of the profit equation, you don’t have to work as hard to achieve the same level of profitability.

It is often easier to work with the third lever than it is to work with the first two. Moreover, you will find that you can increase your business’ profitability even more by combining the power of two or three of the three levers.