As a business owner, you want your business to grow in one way or another. One common way that assures you of growth is the number of profits you make. High profits allow you to expand your operations, which is part of growth. Now, it’s always advantageous to gauge your company and predict where it’ll be in two-three years. One of the aspects that’ll help you know the growth capabilities of your business is by measuring its profitability. Profitability means the ability of your business to make profits. It begs the question; how do you measure profitability?
This article discusses several techniques you can adopt to measure your company’s profitability; read on and know these mechanisms:
Traditionally, it’s said that companies handle their marketing separately from other departments. Although it works at times, it isn’t an advisable way of approaching marketing if you want to achieve profitability as a business. Due to inefficiencies, there was a need to find a different approach to combine marketing with the financial aspect of a business. This approach is revenue marketing.
Revenue marketing metrics aim to compare marketing strategies to the returns these strategies bring as sales. Therefore, consider adopting revenue marketing to measure profitability. How’ll you go about this?
First, your sales and marketing teams have to work as one. Once the marketing team adopts various marketing mechanisms, the sales team should track the techniques to see how many sales each strategy makes. Remember, you’re using resources to implement marketing strategies. Therefore, if you’re barely making sales through your current marketing strategies, you’re less likely to be profitable as a business. However, if these strategies bring in sales, you’re on the road to attaining profitability. These profits will help grow your business.
The overhead ratio is between your overhead costs and your income as a business. Overhead costs are the aspects of your business that you fund, yet they don’t bring any returns. They include equipment maintenance, taxes, rents, and other office utilities.
Make a point to add your overhead expenses and subtract this figure from your income. If it’s negative, you’re less likely to achieve profitability, and the reverse, if it’s positive. Consider reducing your overhead costs, including eliminating those you don’t need to bring about profitability.
The profit margin refers to the profits you generate through your company's daily sales. It’s associated with the final price of your products. And as a business owner, you want to compensate for all the money you’ve spent during the production process. It is what you’ll add to a product’s final price.
Suppose you spend USD$4 to manufacture a product and sell it for USD$8. The difference, which is USD$4, is your profit margin. The amount of profit you make from sales is another measure of your company’s profitability. Thus, the higher the margin, the higher the profitability.
The break-even point refers to when revenue is similar to expenses. At this point, you won’t be making profits or losses. How do you calculate your break-even point?
You need two figures, the fixed costs, and the contribution margin. Fixed costs are the expenses you’ll incur whether or not you do any production. They include rent, labor, maintenance, etc. On the other hand, contribution margin refers to the difference between your selling price and variable cost per unit. The variable cost per unit is the amount you spend on production. The selling price is how much you’ll sell the product per unit. With these figures, divide the fixed costs by the contribution margin per unit, and you’ll have your break-even point.
Your break-even point will help you know how many goods you have to produce and sell to cover all your expenses. Beyond these figures, you’ll be making profits. Therefore, you’ll know the extra goods you must produce to attain profitability as a business today.
Instead of letting it sit in their business accounts, most businesses tend to invest their income to make money work for them. They can decide to build rental property to earn income, or acquire stocks to earn interest and dividends, etc. The amount you make from these investments is one way of measuring your company’s profitability.
Here, you need to compare the amount of money you used to build the given property with the amount it’s generating for you. After how long will you start making profits from the investment? You’ll only make profits once you’ve paid yourself all the money you put into realizing the investment. What if instead of making profits, you’re constantly making losses? Your business profitability rates are low.
The discussion above has shown you how to measure the profitability of your business. Knowing your profitability is essential in understanding if you’ll thrive in business or not. Therefore, consider adopting the techniques given herein, and you’ll know where you stand. You’ll also know your next course of action to better your business to realize growth.