When it comes to running a business, profitability is essential to ensure that your doors stay open. While every business needs to make money, it can be difficult to determine exactly how profitable your operation is. As leading providers of comprehensive business consulting services, the team at Leskun & Son Accounting knows how difficult it can be to track every financial element of your business. That is why we have provided some information outlining how to track profitability for your business to help you understand where to start and whether you will need to hire a bookkeeper to monitor this information.
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3 Ways to Track Profitability for Your Business
To track profitability for your business, perform the following actions:
1. Analyze Margin and Profitability Ratios
Running your margin ratios is one of the most effective ways to determine if your business is generating profit. To run a margin ratio, you will need to gather three distinct elements from your income statement. These elements include:
- Gross Profit (Net Sales – Cost of Goods/Services Sold)
- Operating Profit (Gross Profit – Operating Costs and Administrative Expenses)
- Net Profit (Operating Profit + Any Other Income – Additional Expenses and Taxes)
Determining these three elements will help you determine what your margin and profitability ratio is from a dollar perspective. While there are several additional calculations that can be performed, these are a great place to start for any business regardless of their size or industry.
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2. Perform a Break-Even Analysis
A break-even point is where your business expenses are equal to your business revenues/income. If your business is running below this point, you are suffering financial losses. Alternatively, if you are running above this point, you are generating profit. It is extremely beneficial to determine and evaluate your break-even point as it will tell you at a glance if you are generating profits or experiencing losses. If business starts to decline, your break-even point can tell you how much of a buffer you should have, helping you prepare for the unexpected.
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3. Examine Your ROA and ROI
ROA (Return on Assets) and ROI (Return on Investments) are crucial indicators for profitability. ROA refers to the profitability of your business compared to your total assets and can be calculated by dividing your business’s net income by your total assets. ROI refers to the profitability of your business’s investments and can be calculated by dividing your net profit before tax with your total net worth. It is crucial to analyze both of these elements as frequently as possible to stay on top of potential losses or changes in revenue.
Learn more about our small business consulting services.
To learn more about tracking profitability or to inquire about our business consulting services, get in touch with the team at Leskun & Son Accounting. We can be reached through our online contact form and will be happy to answer any questions you may have regarding our services.