Business Broker

If you are the owner of a business or contemplating starting a business, you should understand the importance of computing business profitability. With any business, no matter what good or service is being provided, it is very important that the owner understand the business side of the business. The purpose of company is to generate a profit.

Revenue versus Profit

Many people think that profit is the money a business brings in. This is not true. The total money brought in by the business is called revenue and this is different from profit. For example, if you sell an item for $100, you have $100 of revenue. To get to profit, you need to subtract the expenses out. For that $100 product, it may have cost $50 to make, there could have been additional overhead costs of $10, and employee expenses of $5 associated with that product. That would mean that there was $65 of expenses associated with that one product. So out of that $100 of revenue from the one product, you will make $35 of profit.

As you can see, it is important to set your business goals to make a profit, not just make revenue. This is the importance of computing business profitability. You need to make sure that your business brings in enough money to not only cover the expenses but make sure that there is something extra so that you can take some money out of the business.

Fixed Versus Variable Expenses

When computing business profitability, you will notice that your business has many different expenses. Some of these expenses are fixed and others are variable. Fixed expenses are expenses that you must pay not matter how much product you make. Examples of fixed expenses are rent, employee expenses, and some utility costs. In the above example, the $10 of overhead costs and $5 of employee costs are fixed expenses.

Variable expenses are expenses associated with creating additional product. In the above example the $50 cost to make the product is a variable expenses. You only have this expense if you produce an additional product.

It is important in computing business profitability, that you make sure that you are at a minimum covering your variable expenses. If you are not covering your variable expenses, then you are losing money with each unit you produce.

Get Professional Help

Computing business profitability can be a tall order, especially for a small business owner. You should hire a competent accountant or attorney to help you with your analysis. There are many profitability ratios that can be used to show the health of your business.

The More You Know

The more you know about the profitability of your business, the better off you will be. It is important that you stay up to date regarding the financial health of your business. You should constantly be computing your business liability and making any necessary changes.

By: Gary Pearson