Most business owners must have heard if the term “profitability”. As all the for-profit organisations have the same objective, that is to earn money, all of them would pay particular attention when it comes to profit. Hence, no matter how busy they are, business owners should never forget to assess the profit margin of their business throughout their business venture.
To determine the profitability of your business, the first thing you need to do is to calculate the revenue that it has earned. Depending on the size and the type of business you are running, you may receive your earnings via different methods (Also see How to Prepare a Cash Flow Statement by Using the Direct and Indirect Methods?). This includes the cash you receive by using the cash register machine, the monthly payments you obtain from your customers, and so on. Keep in mind that you should always keep records of the transactions whenever you receive or spend money. It is advisable to do the calculations monthly so that you get to know the sum of revenue you have earned every month.
Next, you need to work out the sum of money that your business has spent. You should consider all the costs incurred as your company’s expenses, which may include rentals, labour costs, money spent on the procurement and maintenance of equipment, taxes, and so on. Most people would call these costs as overhead costs. When you are calculating the expenses incurred, you should factor in all the money that you have spent every month carefully so that you know the total amount you have spent on all business operations. By ensuring the accuracy of these figures, you will be able to know the exact profitability of your company.
After getting the amount of profit (Also see The Relationship Between Net Profit and Operating Profit) and expenses, the last thing you need to do is to deduct all the costs from the total revenue generated. By doing so, the figure that you obtain will be the profit that your company has earned. If you are a sole proprietor, this amount will be your net profit. If you are running a partnership, you need to divide the sum of profits among other partners.
It is more advisable for business owners to calculate the profitability of your business on a monthly basis. If you do so, you will be able to know which months have higher sales when compared to others. This is for you to know the trends of the market better so that you can make adjustments or improvements according to the timing better. Besides, you should identify the profitability of your business before and after you make any changes. Hence, you will be able to know whether the changes that you have implemented are working.
As we can see from the explanation above, the calculation of profitability requires accurate records for all business transactions. Yet, most business owners will not have time to deal with bookkeeping as this task is very time consuming, and it requires some basic knowledge in accounting (Also see Basics of Cost Accounting). If you are one of them who do not know how to calculate their company’s profitability due to insufficient records, it is more advisable for you to hire an accounting firm in Singapore.