How to Make Sure Your Business Is Profitable
Understanding how to make money is of paramount importance when growing a business. Increasing your profits will help you become a more successful competitor in your industry. It will also give you the ability to develop and introduce new products to keep customers interested and happy. Staying in the black is also essential if you want to secure funding from investors, shareholders, or financial institutions. Here are a few simple strategies you can use to make sure your business is fruitful.
Calculate Your Margins Regularly
If you don’t track your profit margins regularly, you may not notice you’re taking a loss until it’s too late. There are two important margins you should be tracking: gross and net. The former refers to the difference between the cost of goods sold (COGS) and your revenues. The latter refers to the total annual percentage of revenue your company keeps after deducting all expenses — both operating and non-operating. You can use an online calculator to calculate margin or figure it out yourself using these tried-and-true mathematical formulas.
Gross Profit Margin Formula
To figure out your gross profit margin, you first need to calculate your gross profit. Then, divide your gross profit by your revenue and multiply that number by 100. This will give you your gross profit margin as a percentage. For example, imagine your business makes $80,000 this year providing lawn care services and it costs you $10,000 to provide those services. That means your gross profit is $70,000 ($80,000 in revenue minus $10,000 in expenses).
Now that you have your gross profit number, it’s time to figure out your gross profit margin. To do that, divide your gross profit ($70,000) by your revenue ($80,000). You should get the number 0.875. Multiply that number by 100 to reveal your gross profit margin of 87.5%. Across most industries, your margin is “good” if it’s above 20%.
Net Profit Margin Formula
This calculation isn’t much different from the one used above. To start, take your gross profit and deduct all additional expenses from it to determine your net profit. For example, in the lawn care services example above, the gross profit is $70,000. Now, imagine you spend an additional $5,000 on operating expenses and $10,000 in taxes. That would make your net profit $55,000.
To determine margin, divide your net profit ($55,000) by your revenue ($80,000) to get 0.6875. Multiply that number by 100 to reveal your net profit margin of 68.75%. Typically anything above 10% is considered “good” by most industries.
Develop a Solid Business Plan
Many business owners believe that if they launch a great product or service, money will naturally follow. Unfortunately, that isn’t always the case. You probably wouldn’t embark on a destination road trip without first planning where to go and how to get there, right? Similarly, you shouldn’t launch a startup until you outline how you’ll build a successful company. A solid business plan can help guide your company grow and increase revenue.
Every good business plan should include an executive summary, company description, business goals, and projected operations costs and other expenses. At least some of your goals should be numbers-oriented (such as selling “x” number of products or bringing in a specific dollar amount in revenue). Invite input from directors, managers, and other company employees to make sure your business plan is both optimistic and realistic.
Focus on Good Financial Management
Sound financial management practices can go a long way toward boosting your revenue and cutting unnecessary spending. If you engage in reckless spending and don’t regularly track your margins, you could bankrupt your new company before you know it. Whether you have a full-time financial department or you’re crunching numbers yourself, make sure you’re following good financial management practices.
Learn how to keep and analyze your income statement, balance sheet, and cash flow sheet. These sheets can all give you a basic understanding of whether your business is spending and earning responsibly. It can also help you set future budgets and build a more successful business. Knowing how to budget effectively is essential for increasing your revenue and maximizing your profits.
Adopt Effective Pricing Strategies
Pricing your products competitively is important for attracting customers and boosting sales. But you have to be careful not to set your prices so low that they don’t pay for themselves. Some companies try so hard to offer the most affordable products that they price themselves right out of business! You need to make sure you’re making enough money from your product sales to not only pay for your expenses but also support business growth.
To help you price your products, consider looking at industry pricing methods to figure out which one is a good fit for your business. Cost-plus pricing involves figuring out what it costs to make your product, and then adding a fixed percentage to it. Value-based pricing is when you set your prices based on the perceived market value instead of the actual value. Competitive pricing is when you price your products similarly to your competitors. These are just a few of the pricing strategies from which you can choose. What works best for you will be very specific to you.
Profitability is an essential metric that can reveal whether or not your business is likely to fail or become successful. Follow these strategies to continue growing and competing with other businesses in your industry.
