How Do I Know If My Business Is Profitable?

If you're reading this, then you're probably a small business owner looking to generate income and make a profit. That's the dream, right? But you can't just add up the number of sales and assume that your business is profitable. Instead, you’ll need to understand exactly how much cash the company is making.

You don't need the sophisticated tools of accountants, the knowledge of tax law, or even ledger accounts to do this – maybe just an understanding of basic accounting principles will do.

Keep Track of All Your Income

The standard method for keeping track of the money you receive for your business is through accounting software. This allows you to keep track of the money you receive for your business in real-time and ensures that you're able to track all your sales and deposits, as well as run reports each day, week, month, and year.

There are several different software programs on the market that can help you do this, but the most popular and widely used is QuickBooks. The great thing about QuickBooks is that it's constantly being updated with new features and improvements, so it never gets stale. 

Calculate Business Expenses 

The easiest way to determine if you’re making a profit is to start with your expenses. Add up the cost of labour, materials, production, supplies, bills, and any other expenses that come to mind. 

Don’t forget to include the cost of running your business such as rent, utilities, and insurance. Calculate these costs on an annual basis. Then subtract them from your gross annual revenue (money in) to get your net annual income (money out).

Subtract Operating Costs from Revenue

The next step you will need to take is to subtract all your variable costs from your total revenue. Variable costs are the costs of goods sold, or COGS. These are costs that are directly tied to the production of the goods or services sold and include things like materials, shipping and packaging, labour costs, and some marketing fees. 

For a service-based business, variable costs include things like travel fees, subcontractors, and materials used in delivering services.

Analyze Profit and Loss Trends Over Time

Another way to examine your profits is to calculate monthly revenue as a percentage of total revenue. This will help you determine which months are best for business, as well as how well each month compares with the others. In other words, this type of analysis can help you determine which months are more profitable than others, and what drives those results.

You can also look at individual expenses and compare them with one another for the same time period. This will help you understand which expenses are growing faster than your income, so that you can get a handle on them before they affect your overall profitability.

Budget For the Future

You should also create a budget for your business that includes realistic goals for your income, expenses, and profits. A budget will help you determine how much money you need to make each month to cover your costs and show a profit.

There are many things to consider when conducting an analysis of your small business. However, understanding some basics of accounting will help you effectively gauge whether your business is making money. 

By keeping careful tabs of where your money is going and what you spend it on, you’ll be able to adjust your business model as needed to improve its profitability. With that said, we'll be here if you have any questions.