Successfully computing business profitability can be challenging for business owners. To arrive at accurate figures, a number of components need to be considered.
Computing Business Profitability Versus Cash Flow
Business profitability is the amount of money the business needs to earn to stay in the black. It is a figure calculated by adding up all the money coming into the business and subtracting all the expenses associated with running your business.
Cash flow is a different thing entirely. It is the money coming into the business, from the sales of products or services, investors, loans. lines of credit, etc. Having good cash flow means that the business has the funds to meet its financial demands over a certain period of time.
If you see revenue coming into your business from sales, loan proceeds, or advances taken on a line of credit, this does not mean that the business is actually turning a profit. In order to make that determination, you need to look at the bigger picture.
Calculating Your Business Revenue
To keep track of the amount of revenue your business is bringing in, you need to have accurate figures for the following:
- Total Amount Received for Sales and Services
- Total Amount of Refunds Issued to Customers
- Amount of Discounts Given to Preferred Customers and Employees (if any)
By taking the total amount received and subtracting refunds and discounts, you will be left with the figure for net sales.
Calculating Business Expenses
Your business expenses will need to be deducted from your net sales. To figure expenses list the cost of all moneys paid out to help your business make money.
When you are computing business profitability, include the following on your list of expenses:
- Depreciation for furniture and equipment purchased
- Rent or mortgage interest (depending on whether you own the space your business occupies or not)
- Health Insurance (for yourself and your employees)
- Salaries or wages paid to employees
- Legal fees
- Accounting fees
- Licenses and fees
- Travel expenses
Once you take the total of all these expenses, deduct that amount from the net sales figure. If you are left with a negative number, your business did not turn a profit. If, however, you have a positive number, then your business is making money.
Business Profitability Computation with Software
A spreadsheet program, such as Excel, can be used to calculate business profitability.
- Download business calculators at Datapicks to provide you with detailed information about business profitability, cash flow, financial planning, cost of borrowing, and more.
- FinanCal for Excel is available for a fee online. This version includes 16 calculators and also provides a currency converter.
- If you need more detailed calculations for your business, you may want to consider buying Financial Adviser for Excel, which is available from Blue Chillies Software Download. This package is referred to as the "Swiss Army Tool of financial calculators" on the website.
Having accurate figures when computing business profitability is essential to keeping track of how well the business is performing over a certain period of time. Whether you use a spreadsheet, some specialized software, or hire an accountant to take charge of this aspect of your business, it needs to be addressed as part of your overall business plan.