Business and the Profitability Quotient Made Easy

Unless you are an accountant, you may have a difficult time following the discussions about the worth of a business and/or the profitability of a business. Terms like appreciating and depreciating, crediting and debiting, ROI, etc. are thrown around like everyone knows exactly what they mean and understand them. The good news is that you don’t have to understand any of the above terminology to figure out if your business is profitable or not. Listed below is a very simple and straightforward method to track the profitability of your business. More importantly, in order to improve the profitability of your business, you need to know if it is profitable and in what areas you can improve to make it more profitable.

In order for this method to give you realistic and actual profit numbers, you have to have access to and track certain things.

Sales
Cost of goods sold (COGS)
Expenses

Sales

Sales are the amount of money you receive for the sale of your products and/or services. Do not include any city or state sales tax, as you will have to pay all of it back to the city or state. You need to keep detailed records of your sales by day, week, month and year. There are many computer programs that can do this for you.

Cost of Good Sold (COGS)

Cost of goods sold, often abbreviated as COGS, is exactly as it sounds, the cost of all of the items you sell. This also needs to be tracked by the day, week, month and year, and also needs to be tracked by each individual item. For example, if you sell a widget for $2.99 and pay .99 for it, your sales figure is 2.99 and your COGS is .99.

Expenses

Expenses are not what the IRS and accountants refer to as expenses. For our purposes, expenses refer to anything and everything that your business spends other than COGS. This includes rent, mortgage payments, automobile payments, office expenses, phone bills, electric bills, payroll, etc. Expenses also need to be tracked by the day, week, month and year.

Once you have all of this information, you can quickly determine the profitability of your business using the following formulas.

Sales – COGS = Gross Profit

Gross Profit – Expenses = Actual Profit, before taxes.

As you can see, you can track your profit by day, week, month and year. This is very valuable to determine trends and to see where you may be able to improve the bottom-line profit of your business.

For a further discussion about ways to improve your business profitability, see our Improving Business Profit page.

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