Having a profit for your small business can be an exciting time. And looking at your financial statements that showcase your profit can help you understand how your business is doing. Using statements such as your chart of accounts will help you analyze which parts you’re doing well and where you’re struggling.
If you’re interested to see if your business is profitable, then there are ways to calculate it. Here’s a guide on how you can calculate your business’s profitability.
What is the Profitability of a Business?
Profit and profitability are similar things, but there are some major differences. Profit reflects the number determined by income and revenue beyond the costs or expenses of a company. You can find this by taking your total revenue minus your total expenses that show on your income statement.
But your profitability is relative to the profit of your business. It involves the scope of your business’s profit and the size of your company. This is based on your return on investment based on investments made and how it affects the company.
Measuring profitability can help an owner see if their investments are paying off. This typically includes how they choose to complete operations or what resources are used for the product or service. Analyzing the profitability margins can help them determine if their current procedures are worth the investment and how it’s affecting the company.
How to Calculate Profitability
There are several ways business owners can measure the profitability of their company. The best way to do it is by measuring their profit margin through their income statement. This includes:
- Net Sales – Cost of Goods Sold = Gross Profit
- Gross Profit – (Operating Costs, including Selling and Administrative Expenses) = Operating Profit
- (Operating Profit + Any Other Income) – Additional Expenses – Taxes = Net Profit
This can show a dollar perspective of the profit being made. However, for better analysis, you can utilize other formulas to get ratios that showcase your business’s efficiency