Without a doubt, anyone who opens a company wants to have a profitable and lucrative business. The count to make this happen is not complicated: a successful venture has more profit with less investment, and most of the amount of a product sold stays with the company.
To know for sure if your business is profitable, the first step is to understand what is the difference between profitability and rate of return. The two terms are usually mixed.
The first is a measure used to indicate how much a company has actually earned in relation to all products sold in a given period. The second is related to the initial investment and the return that this investment can provide to the business.
To calculate a business’s rate of return, you need to find the net profit in order to relate it to certain investment. Thus, the formula for its calculation is as follows: (net profit / investment) x 100.
Although they are different concepts, profitability and rate of return have a direct relationship when evaluating the health of a business.
Keep reading and check out 4 tips to identify if your business is profitable:
1. Analyze your gross and net turnover
Gross turnover is all the money that goes into the your company’s cash before you use it for paying bills, employees, taxes and the like, while the net turnover is the remaining amount after paying such expenses.
2. Know your operating costs
Here, we find one of the most important steps to identify whether your company is profitable or not. Operating costs are those that need to exist for the business to operate, and are classified as having no income expectancy.
For example, operating costs are rent, electricity, water, telephone, etc. You should have all of these values listed, preferably in the same place where you recorded your company’s gross and net turnovers.
3. Know what are your fixed and variable costs
In addition to operating costs, it’s important to note what are your company’s fixed and variable costs.
Fixed costs are those constant expenses that don’t vary according to the business’s turnover, whereas variable costs may be larger or smaller depending on the production or sales of a given month.
4. Compare with the rate of return of competitors
Once you gather all the necessary information and calculate the rate of return, you may want more income. At that point, the best way to find out if there really is room for that is to compare your company’s rate of return with that of the market, paying attention to your competitors and studying the results of other companies.
Of course, the numbers will depend on your business’s industry. We know that, as a rule, the service sector has a higher rate of return than small businesses or the retail sector. On the other hand, historically we see that the rate of return of companies has been decreasing dramatically due to several factors: increased competition, increasingly demanding customers, government pressures, taxes and more.
This can be a laborious process, but it is important to know the health of your business. Currently there are software programs that make it easier to calculate and assess the rate of return of a business, integrating all the information in one place and optimizing the process.