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Proitability shows whether your business is actually making money after covering all of its costs. Typically (but not always), this is based on the amount you are selling of your product or service.
When thinking about business sales, there are many different terms which may come into play.
Revenue: The total income a business makes from selling goods or services before subtracting expenses
Simple Revenue Formula: Number of Units Sold x Price Per Unit = Total Revenue
Or, to find gross revenue (a more accurate representation), we may have to consider other factors which change this formula, such as returns or discounts.
Gross Revenue Formula: Total Revenue - Returns - Discounts
Profit: The financial gain when a business's revenue exceeds their costs and taxes.
Simple Profit Formula: Revenue - Expenses = Profit
Cash flow: movement of money in and out of a business. When more money comes in than goes out, the business can pay its expenses and continue operating. When more money is going out than coming in, even profitable businesses can struggle.
Important Things to Consider
Important Things to Consider
While sales can sometimes be a good indicator of how well a business is doing, high sales do not necessarily mean a business is succeeding. For example, if these high sales come with low or negative profit, then it won't mean as much as a business with lower sales but higher profit margins.
To improve profit, businesses can:
Increase Prices
Reduce unnecessary spending
Focus on high value customers
Improve efficiencies
Small changes can make a big difference over time. One of the most popular examples is American Airlines, who saved $40,000 in 1987 by removing one olive from each salad!
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