Running a business, more particularly the small-scale one – might be challenging and rewarding at the same time. Your job may range from designing interiors to monitoring your business’s financial health. How to know if your business is making money may require you to understand, among others, the basic principles of accounting, checking reports and numbers, etc.
This article delivers guidance points to figure out and ensure that your business stays on track and is profitable.
Determine Your Net Profit Margin
A key number to define your business’s profitability is net profit. The calculation formula is simple, namely
Profit = Revenue – Expenses
The formula states that you can easily find your net profit by tracking your revenue and expenses.
If you get a positive number, it means you’re making money. If the result is a negative number, you’re losing money. Meanwhile, zero result means you have a breaking-even point.
For example, a kaolin manufacturing business with annual revenue of $100,000 and expenses of $25,000 will have a net profit of $75,000 per year.
Ideally, you need to check your profits not only annually but also on a monthly basis too. You can see whether your profit is growing or shrinking (and how fast their pace is?), or whether your profit seems to be stuck per month.
Define Your Gross Profit Margin
- Gross Profit
An important profitability indicator, gross profit is the numbers that you get when you are selling physical products. The figures show how profitable your goods are. You can determine your gross profit by using the following formula.
- Gross Profit = Sales Revenue – Cost of Goods Sold
What includes in the cost of goods sold are materials, labor, and overhead costs.
- Gross Profit Margin
This margin is about the percentage of your business’ profit (revenue) you’re gaining compared to (or that exceeds) the cost of your products. The following is the formula you can use to count your gross profit margin.
- Gross Profit / Sales Revenue = Gross Profit Margin
The higher the percentage, the more profits you get compared to the production costs. If the result is below 50%, it implies that your products cost more than half of your sales revenue.
Track Your Operating Expenses
Okay, how to know if your business is making money, especially when you find that you have an increased revenue but decreasing profit? Try to look at your operating expenses as they tend to increase faster than your revenue.
Higher operating expenses are sometimes unavoidable since it highly depends on your business or industry, in which some may require bigger capital than others. For example, when you purchase new equipment or machinery for your kaolin manufacturing business or hire a new employee (or experts).
Measure Your Profit per Client
Indeed, different clients may contribute different profitable results. Some may bring the most profit, while others can be less profitable.
However, the clients that you think are the most profitable may not be the ones who pay you big. Even, the more you charge them, the more expenses you might incur. On the contrary, smaller clients sometimes can be more profitable because they may have a better ratio between revenue to expenses.
Let’s do a little math to analyze your profit per client.
Gross Profit per Project = Total Project Fees – Project Expenses
Also, you can compare the hourly wage you get for each client (or project) as follows.
Hourly Wage = Gross Profit per Project / Hours Spent on Project
Only after that, you can prioritize or even get more clients (or projects) who give higher hourly wages.
Line Up Your Forthcoming Prospects
You have to spread your profits evenly and fairly throughout the year to accommodate your cash flow. Unfortunately, most business owners are too engrossed in one project that they forget to write down the next potential ones.
Line up your prospective projects somewhere you can easily see them. If you have a short list, some marketing efforts can be the best strategy to appeal to new businesses. Please remember, a lucrative business is always growing, not stagnant. Today’s latest accounting software can greatly help you with those hacks on how to know if your business is making money. If you are specifically interested in the kaolin business, start and run your business now with PT Yukami – the leading kaolin clay supplier in Indonesia – and see whether you’re going to make money or not.