Generating profit is crucial to the survival and growth of your business. Measuring it is one of the ways you can monitor the financial performance of your business. It will also help you implement strategies to make it better.

For your business to be profitable you first need to understand the concept of profit.


It’s important to know that profit is not the money you have in the bank, or the amount of sales you make. It is the positive financial gain your business makes after all your expenses have been subtracted.



Your business must make profit to survive.


Below are 4 key things you should be able to calculate and understand to ensure your business is profitable and on track to stay that way:


How To Calculate Your Profit Margins

These are one of the most commonly used financial ratios and are calculated at two levels, firstly as gross and then net. The higher the margin the higher the profit – this means more money in your pocket. Margins vary according to different industries so find out the benchmark that relates to your industry.

Your gross profit margin (GPM) is a key indicator of your business’s overall health and shows whether the average mark up on your products or services is enough to cover your cost of goods sold and still make a profit.  GPM’s differ according to industry Different industries have   The formula to calculate your gross margin is:

GPM = Gross Profit / Revenue x 100


Your net profit margin (NPM) measures how much net income or profit is generated as a percentage of revenue. It is a key number to determine the profitability of your business and a positive ‘bottom line’ shows that your company is performing well. The formula to calculate your net margin is:

NPM = Net Income / Revenue x 100



How To Set A Profit Goal

The key objective of most businesses is to make a profit, therefore setting a goal is crucial. We also know that goals are powerful as they help us keep focus on achieving our desired outcomesTo achieve your goal you need to work out how much in sales (turnover) you need in order to produce enough revenue to cover your operating costs plus your personal financial commitments.



What Your Break-Even Point Is

To be profitable in business, it’s crucial to know your break-even point. This is the point at which total revenue equals total costs or expenses. At this point there is no profit or loss, in other words, you ‘break-even’.

Knowing your break-even point is important as your business could be turning over a lot of money but still be making a loss. It’s also helpful in setting prices and sales budgets as well as business planning. 


Your Profit Drivers

Drivers are the different ways your business can make more profit.

The following are common drivers that can be reviewed to increase your profit. Changing these can make a huge difference to your bottom line: 

  • Pricing – Can you increase your prices?
  • Sales Volume – Can you increase the number of sales you make?
  • Variable Costs (COGS) – How much is it costing you to deliver your products/services? Are you making a gross margin that covers costs plus gives you money left over? Can you increase efficiency in this area?
  • Fixed Costs (Operating Expenses) – Where can you reduce spending?


Applying these 4 calculations to your finances will give you the key numbers that underpin your business. Knowing these critical numbers will give you greater control over the future of your business and help you put more money in your pocket. 

If you are ready to make more profit in your business and want help click HERE to book a time.