Is Your Business Profitable?

Profitability is the efficiency of a company at generating cash or earnings above and beyond its cost of doing business. I want to help you understand some basic profitability terms to help you determine how much earnings you take in from the business infrastructure you've built. Next, I'll show you the basic formula to determine the profitability of your business.

The first question you must ask yourself is, "What is profit?" You're in business to make profit not just money. Again, profit basically means making more money than you spend. Many entrepreneurs confuse profit with business income. As a result, they can't grasp why all their business income isn't getting them ahead; or why the bank won't extend their line of credit.

Let's start by defining the following terms:

Revenue - is all the monies received by your business in any given period of time. It is derived from sales, interest income, and any miscellaneous income.

Expenses - These are all monies paid out by your business.

Profit- Profit in its raw form, means "to make positive progress." From a business numbers standpoint it means to have a positive return on an investment by business operations (those activities involved in the running of a business) after all costs are accounted for.

In other words: A company generates a profit when its revenues are greater than its expenses and losses.

Profit Margin - the percentage of sales the company has left over as profit after paying all expenses. It is calculated using a formula and written as a percentage:

% Profit Margin = $ Profit / $Revenue

Salary or Distributions - Money paid to the owner by the business as a regular salary. Some owners choose to take distributions during the first two years and begin taking a salary in the third year. Make sure to talk with your CPA about
this topic.

Next question is, "Am I making a profit?" Now we can look at the most basic way to tell if your business is actually making a profit, not just recording sales.

Most business owners are very good at tracking their revenue. In reality, that's not what you made or that's not profit. It is revenue. It's what's coming in. In order to figure your profit you have to subtract what is going out:

Revenue - Expenses = +Profit

This is a very basic representation (work with a CPA to determine the best equation for your business), but in order to show a profit your ending balance after this transaction must be a positive number. If it is a negative number then the calculation would look like this:

Revenue - Expenses = (-Loss)

Part of the expenses will be your salary or distribution depending on how you set up your business. Make sure to ask your CPA about this; they should be able go give you a professional opinion based on your business infrastructure.

Now that you have a basic definition, remember in the beginning of this article I said - Profitability is the efficiency of a company at generating cash or earnings above and beyond its cost of doing business - it's time for you to determine how much above and beyond you want to go.

Take the time over the next couple of weeks to determine your profit margin goals and measure them against your profit numbers today. Also keep in mind that profit doesn't mean cash in the bank. That's a topic we'll discuss in an upcoming issue.

It's important to take the time to determine the profitability of your business - this will help solidify the future vision.

Efficiу, Inc. Sherese Duncan

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