Starting Up: How to know if your business is profitable

Starting a business can be a daunting task, but it can also be incredibly rewarding.

Whether you're starting a business because you've been laid off and need to take care of your financial needs because you're passionate about what you do, or because you want to take control of your own destiny, one thing is clear, the primary purpose of starting a business is to make a profit. Without profitability, a business simply cannot survive. Of course, there are many challenges that come with running a business, but with hard work, dedication, and a little bit of luck, you can turn your business into a profitable and successful venture.

As a business owner, it is crucial to monitor your profit on a regular basis in order to ensure the success and growth of your company. Checking your profit not only annually, but also on a monthly basis, allows you to stay on top of your financial performance and make any necessary adjustments. By examining the previous month's profit and comparing it to the first of the next month, you can determine whether your profit is increasing or decreasing and how quickly it is doing so. Regular monitoring helps you to make informed decisions and keep your business on the right track.

…But first what is profit?

Profit is the lifeblood of any business, as it indicates success and growth. It is the amount of money left over after all expenses have been paid. Profit is crucial for the progression and sustainability of a company, and there are many factors that can impact its profitability. These include the state of the economy, pricing strategies, competition, consumer demand, and variable costs. By carefully analyzing these factors and making strategic decisions, businesses can increase their profitability and achieve long-term success.

Hence, profitability in business is determined by the revenue from operations, less the expenses. When a business’s expenses are deducted from the revenue generated from the business activities, and the result is positive, it means the business is profitable. However, if the result is a negative result (loss on the income statement), it means the business is not profitable.

…what types of profit are there?

• Gross profit: Gross profit, also called gross income, is calculated by subtracting the cost of goods sold from revenue. Gross profit only includes variable costs and does not account for fixed costs. Gross profit assesses a company's efficiency in using its labor and supplies in producing goods or services.
• Net profit: Net profit is the amount of money that a company has after all its expenses are paid. You can think of net profit like your paycheck: It’s the money left after all taxes and benefits are subtracted. Found on the last line of the income statement, net profit impacts the “take-home” profit of a company.
• Operating profit: Operating profit is a financial measurement that calculates how much profit a company makes from its core business activities. This figure only includes income from core operations before taxes excluding all income from investment

Now that we understand the meaning of profit in business, it is essential for us to know if our business is profitable or not, there are two factors that can determine the profitability of our business which are:

• Internal factors: that determine business profitability include direct and operating costs, pricing, economies of scale, and management. Your business goals and objectives may also affect how much profit you can make.
• The external factors: that affect profitability are inflation, the state of the economy, price caps, and exchange rates. Taxation rates, the occurrence of pandemics, and competition are also part of external factors.

The profitability of a business is a highly individualized concept. What may be considered a profitable venture for one person may not be for another. This is because profitability is dependent on an individual's budget and specific financial goals. For example, if a business generates one million Naira in net profit each month, it may be considered profitable for one person if it covers their minimum budget needs. However, this amount may not be sufficient for someone else with different financial objectives.  

Ultimately, a business is considered profitable if it meets the unique financial needs and goals of the individual running it. Now that you know that profitability is in your hands and profitability is vital for any business to thrive, you also need to that starting a business requires an entrepreneurial spirit, patience, intelligence, and courage.

In conclusion, determining the profitability of your business is essential for its success and growth. By regularly monitoring your profit margin and comparing it to your budget needs, you can gain a clear understanding of whether your business is profitable or not. Additionally, it is important to be proactive and make necessary adjustments to improve profitability.

If you need professional advice or consultation, feel free to fill out our contact form and a consultant will reach out to you as soon as possible.