How Profitable is Your Business?

Ultimately, any business has to make a profit. Whilst not all small business owners have aspirations to found the next multinational corporation, all need their companies to make enough profit to sustain an appropriate business model.

Gathering And Processing Information

The key to ensuring profitability is to know what is going on in all areas of your business. In order to do this, you will need to institute sensible financial processes from the very beginning of the business. Keep records of all of your outgoing expenses and incoming revenues, and use one of the freely available software packages to keep track of the difference. Don’t simply be reactive, but produce estimated forecasts of your cashflow, and update these regularly based on what has actually happened. Whilst all of this may seem obvious, it is astonishing how many business owners have little more than hunches to go on when assessing the success of their enterprise. Needless to say, these tend to be the companies which run into difficulties during hard economic times, or during an unexpected adverse event.

Short Term Profitability

In many ways, short term profitability is one of the easiest financial metrics to master. Simply put, are you bringing in more money than you spend? If so, you are in profit. Of course, life in business is never quite that simple. You can be in profit one month and make a significant loss the next, which is why cashflow planning is so important. You need to measure your profitability over a variety of short term periods, from a month to a year. If there are any points at which your negative profitability eats into your reserves so that you cannot meet your financial obligations, your company will be technically bankrupt. You should be doing your utmost to avoid this situation, not only because of the legal consequences, but because a reputation for being unable to pay your bills will quickly cripple your ability to obtain new business.

Long Term Profitability

Just as important as the number on your immediate cashflow budget, however, is the long term profitability of your business. This can be much harder to judge, and requires a strategic look at the sector in which you are operating. Whilst you might be in a position in which you are making a small profit each month, you need to take an honest look at what it will take for your business to survive in the long term. Are you likely to need to make a large asset purchase to expand, for example, or even just to stand still? If you are not accumulating enough profit month by month, eventually there will come a point at which you are unable to afford to keep up with the competition. You also need to examine the effect of your business on your personal life. Are you working long hours to sustain a small profit, and can this be maintained in the future? Ultimately, profitability can be about more than just numbers.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.

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