What makes a business profitable? How do you decide whether a business decision is good for your company?
Basically you have to know IF your business is profitable, WHY your business is profitable, and HOW to increase those profits. The best way is to educate yourself on computing business profitability.
Computing Business Profitability Tells You If You’re Profitable
Your ultimate goal for your business is no doubt to generate profitable sales and see the resulting growth of business. It’s imperative to know if your business is turning a profit or not because important business decisions are based on that knowledge.
One method is by using a profit and loss statement. On this financial document, all your revenues and expenses for a given period are recorded, typically for a fiscal year or quarter. These numbers will give you information about your business profitability and areas in which you can reduce costs and increase revenue.
Unfortunately, some companies haven’t a clue about how profitable they are or even IF they are, until they receive word from their accountant. Too many times, this is too late to make any adjustments that could keep you from experiencing a loss. You need to be making frequent reviews of sales and expenses to determine changes that may need to be made.
Computing Business Profitability Tells You Why You’re Profitable…or Not
It’s important to know where your profitability is coming from in order to determine areas that need improvement. Did you know it’s infinitely cheaper and easier to sell to existing clients or customers than it is to generate new ones? It’s entirely possible to increase profitability by decreasing advertising costs and increasing sales and specials for current customers.
The best way to know what your customers like about your business or service and ways you can improve on it is simply by asking them. Disney, who enjoys a 70% ratio of repeat customers, sends out a survey following every vacation taken at one of their resorts. Don’t make the mistake of assuming you must spend more to attract new clients.
Are you spending too much on taxes? Are you generating enough cash to cover day to day operations? To pay back credit obligations? Only by computing business profitability on a regular basis will you know the answers to these questions and be able to make informed decisions about what needs to be done to correct the situation.
Computing Business Profitability Tells You How to Increase Profits
By computing business profitability you’re able to see areas in need of improvement, whether it’s too much spending in one area or not enough in another. Can you offer products or services to complement those you’re already selling? Do you have an area that’s costing you more to maintain than the revenue it’s producing?
These are not questions that can be answered by guessing or estimations. If you’re to succeed in business, you must have goals and a plan in place to achieve them. You have to know at every level your expenses and all associated costs versus the revenues generated. Computing business profitability is the best way to stay informed about the status and needs of your business.