In My View: Four Steps to a Successful Profitability Analysis
Published 08:55 on 9 Dec 2021
Are you uncertain about the level of success you achieved?
A profitability analysis can provide insights into how a business is run, it relates revenue to costs.
Maybe some clients require too much time for the money. Perhaps there are other opportunities around the corner that you can jump on.
Either way, it should be on your list of tasks if you want to ensure long-term business growth. And here's a simple blueprint to follow for a successful profitability analysis.
- 1.Calculate Margins: Two of the most important variables in a profitability analysis are gross and net profit margins. Gross profit margin is calculated by taking your sales revenue minus the cost of goods sold divided by net sales. For the net profit margin, you must subtract all expenses from your revenue and then divide by your revenue. Don't forget to look at the segment profits, too.
- 2.Client Valuation: Look at each client and understand the profitability of each client. To do this subtract all of your costs (marketing, hourly labour, travel, and so on) from the revenue for each client.
Some clients may not pay a lot for your services but may be more profitable than other clients as their projects don't take too long to complete.
- 3.Look at the Past Numbers: A thorough profitability analysis looks at past quarters over the years.
Why?Although your current numbers may look good on paper, you need something to compare them to if you want to know where you stand.
- 4.Benchmark Industry Ratios: Your numbers only mean something in the context of your niche. It's because profitability numbers aren't the same in accounting as in health care, education, e-commerce, etc.
- If you look at your past and current numbers, you can figure out your business's progress so far. But what about compared to your competitors?
- Always be sure to check average industry ratios to give you a better sense of where your company is as opposed to where it should be.
A good profitability analysis can tell you what you should be doing to improve and grow your business.
Author: Debbie Hancock, Southbourne Accountancy, Director of the Chichester Chamber of Commerce and Industry.
Last updated 13:42 on 11 May 2022