*** FREE Bonus Resource: Jump to our business profit calculator. ***
You have to pay the bills. You have to keep the lights on.
A business without profitability, no matter what the size, becomes a hobby.
So how can you be sure your business stays as…well…a business?
I always suggest having a reliable system. Then you ensure that all your bases are covered, and you can increase your business profit.
To help, I’m sharing a 4-step, financial system that shows you how to calculate and improve your business profit.
Let’s get started!
What is profit?
A profit is earning more money or assets than you spent. You need more coming in than going out.
1. Calculate your business profit.
There are two kinds of calculations for profit: net and gross.
Gross profit – the cost of your product subtracted from the sales of your product. It answers the question: does this product make us money?
Sales – Cost = Gross Profit
For example, if you make widgets and they cost $40 to produce and you produced 1,000 of them in a month, the cost of your product is: $40,000.
If you sold all of them for $80, then you would have $80,000 in sales.
Your gross profit would be:
$80,000 (sales of the product) – $40,000 (cost of the product) = $40,000 (gross profit)
Net profit – take the gross profit and subtracting the fixed cost of your business. It answers the question: can we keep the lights on?
Gross Profit – Fixed Costs = Net Profit
If it costs $25,000 a month to keep the lights on, you would subtract your fixed cost of running the business from your gross profit.
$40,000 (gross profit) – $25,000 (fixed cost of the business) = $15,000 net profit per month.
Now you need to find out your net profit margin (This shows how much of your revenue became profit.)
You calculate this by dividing your net profit over the total sales.
Net Profit ÷ Total Sale = Net Profit Margin
$15,000 ÷ $80,000 = 18.75%.
That’s a good number. If it was very low (like 2%) or even negative, you might not be in business very long.
2. Organize your calculations.
Now it’s time to create a table of your gross profit, net profit and your net profit margin.
This is your business profit calculator. Your calculator is easy to construct in Excel or Google Sheets. You can use this table for overall profit, or for individual products.
Profit is vital to your business.
It’s the blood pressure of your business. If your blood pressure is too low, no matter what else is going on, you are in danger of collapse. Organizing your profit will keep your blood pressure stable.
If you have your numbers ready, you can plug them into our business profit calculator here. Or use this calculator as reference for your own!
Business Profit Calculator
3. Analyze your findings.
Now that you’re successfully calculated and organized your business profits, you can start to analyze your table to increase your profits.
Take 3 of the products you offer put their numbers into your profit calculator.
What are your top profit makers?
What isn’t making as much money as you’d hoped?
4. Evaluate your calculations to increase your business profits.
Now you can take those 3 products and increase their profitability by performing two key actions:
- Reducing the cost of your product.
- Increasing the price of your product.
Most companies do not want to increase their price since their prices are already established in the industry. Plus, customers do not usually react favorably to increase.
With that in mind, it’s still possible to raise prices. You could alert your customers to the raised price of your goods, and provide value at the same time.
Say you want to increase the price of your granola. The whole time you’ve been using locally sourced grains, but that’s not a feature you’ve promoted. When you decide to raise the price, you can make it more clear of the value of having locally sourced grains.
If raising the price doesn’t seem like the right decision for your company, you can reduce the cost of the product.
Although it may not seem like it, reducing the price is attainable in most situations.
Here’s some different options to reduce your product costs:
- Purchase your goods in larger bulk
- Switching suppliers
- Adjusting the operations systems that produce your product
Keep in mind that reducing the cost of production doesn’t mean sacrificing quality. You can have both!
Use your profit system!
Too many companies “wing it” and estimate how much they have in profit until the lights flicker, and they realize their company is going under.
You can use your profit system to create a rewarding and rich company. Don’t just keep the lights on, keep them bright and shining!
By calculating and adjusting your business profit, you can move your profit margin up and create products that are profitable from the start.
Share this system with any business owner looking to take control of their profits.
Enjoy your Entrepreneurial Journey!
Share with like-minded business owners!
*BDC. (2020, September 12). The 5 most common pricing strategies. BDC.Ca. https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pricing-5-common-strategies