Is my business profitable?
When you start a company, one of the first terms that is usually a topic of conversation is profitability. What is it? How to get it? How long does it take to achieve profitability? What are the economic conditions that I must meet to be profitable? These are some of the questions that you surely ask yourself as an entrepreneur, and it can be a bit confusing. It is not only about selling, but also about achieving a balance between the income and expenses in your company. You must be clear that the first months, even the first years, you will have more expenses than income, so the break-even point can take time to achieve.
The break-even point or threshold of profitability is reached when the business meets a minimum necessary to avoid losses, that is, that expenses are equal to income. From the break-even point, the company will begin to be profitable. To know if you are being profitable there are several indicators, here we list some of the most important and indispensable for your company.
Net profit margin: with this profitability indicator, you can define what percentage of the income represents the net profit. It is calculated by dividing the net profit (after tax) by the income, and this result is multiplied by 100.
Gross profit margin: unlike the net profit margin, the gross profit margin does not take into account the total expenses of the company, but the expenses directly associated with the production of goods and services. It is calculated as follows: (revenue – production costs) / revenue x 100.
Operating Profit Margin (EBIT: Earnings Before Interest & Taxes): This indicator works to measure operational efficiency and helps establish the pricing strategy of a company. Operating profit (before interest and taxes) is taken into consideration, divided by total income and divided by 100. (Operational efficiency is defined as the business methodology use to reach maximum productivity and the optimization of available resources with the aim of generating the highest possible profitability to an organization, financially and productively speaking)
Revenue growth rate: It is one of the most important profitability indicators, it allows analyzing if the sales strategies are working, it is calculated by comparing the current income with those of previous periods.
Return on investment (ROI): It is one of the best-known indicators in the business world, it allows you to know how much will be the profit that is expected to be obtained from an investment, this indicator facilitates decision-making when investing.
Index of return of Capital Employed: the ROCE is a metric that allows analyzing and comparing the levels of profitability between two or more companies, with the aim of establishing which of the alternatives is better. It is calculated by dividing earnings before interest and taxes by the total capital employed.
Now that you know what indicators you can use to know if your business is being profitable, it is key to periodic review them. With the help of professionals such as My Accounting Now, you will have permanent advice to achieve a financially healthy company.