Is my business profitable enough?
Profitability is the main focus in having a successful business, right? Actually, there are many ways for a business to be successful, it all depends on what you want to get out of your business. You could just want to earn an honest living, or you could want to be the most profitable business in the country. Either way, you need to know what you need to do to ensure your wants become a reality.
What is Profitability?
In simple terms, a business is profitable when income exceeds expenses. However, there are different types of profitability. There are three different ways to measure profitability. They include:
- Measuring profitability for the Principals.
- Measuring profitability for the Investors.
- Measuring profitability for the Business as a whole.
For instance, if your business, as a whole, is breaking even or losing money, but you still pay investors a fixed interest rate, the business is profitable for the investors because they are still receiving an income.
How to Calculate Profitability
Calculating profitability can be fairly simple, but it’s best to keep track of profitability for a period of time to see if your business is gradually losing or gaining money. You need to:
- Track money you receive from your business.
- Add up Business expenses.
- Subtract expenses from income.
If your expenses consistently exceed your income, your business isn’t profitable and you should look into cutting expenses or increasing your income to maintain a successful business.
What do you want out of your business?
The aim of owning a business is to set goals and reach them. If you’re aiming for a comfortable life, then you are looking at maintaining ramen profitability. Ramen profitability is when a business generates enough cash flow that the founders of the company can sustain a minimal lifestyle as quickly as possible without the need to resort to outside jobs or income. This can happen even if the business never shows a profit as a whole. If you aim to have a high corporate profitability, then it’s best to keep that in mind when designing your ledger sheets. Sometimes you have to take a pay cut to make your business more profitable on paper to attract investors.
Creating a time frame
Sometimes it could take a while for a business to see a profit. Typically, it takes two to three years for a business to start becoming profitable, but that doesn’t mean that your business is doing poorly. The profitability time frame depends on how much start-up capital is needed to produce the products and services and how much money is drawn from the company for compensation and investor servicing. To make sure that your business is profitable and is open longer you should…
- Create a business plan
- Keep your expenses low
- Reinvest back into the company
- Be selective with requests (don’t say yes to everything)
These will help you keep your goals organized and keep your business modern and up-to-date while maintaining the profitability of your business.
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