The one knowing what is profitable, and not the man knowing many things, is wise.
How Do You Create A Lucrative Home Based Business?
Profitability is the key to business success and survival and should be the goal of any business.
If your business can generate more earnings than it costs to produce those earnings, then your business is profitable.
The ability to produce a profit = profitability.
The benefits of having a profitable business include sustainability (long term), better exit opportunities (should you decide to sell) and leverage for when you do need to raise funds.
Before we discuss profitability, we need to look at the break-even point.
What Is The Break-even Point?
The break-even point is when your business sales generate enough income to equal your business expen
It is the equalizing point where your business does not make money but does not lose money either.ses.
Determining the break-even point for your work at home business will help you to assess approximately how long it will take before your business can become profitable.
To determine the break-even point, you need to calculate:
- The fixed costs (expenses that have to be paid regardless of income = overhead costs)
- Variable costs (costs that fluctuate with sales) per unit
- Selling price per unit
Break-even point = Fixed costs ÷ (selling price – variable costs).
For example, if your fixed monthly costs are $300 and you are selling each unit at $20 with variable costs per unit of $10, then you will have to sell 30 units per month to break even. If you sell more, you will be making a profit.
How Do I Calculate The Profit Margin?
Money in the bank or cash does not indicate profitability; a cash flow statement indicates liquidity of the business.
Simplified, Profit is:
Revenue (earnings from the business) – Cost of goods or services = Gross Profit.
Gross Profit – Operating costs = Profit.
Profitability is measured by the income generated by the business and the expenses incurred by the business in an Income Statement or Profit or Loss Statement.
Profitability is usually measured for the past 12 months in the Income Statement. You can also project profitability for the coming period through budgeting.
When starting a home-based business, doing a monthly income minus expenses calculation will give you some idea of what is happening with your business and an opportunity to look for alternatives to improving your income or decreasing your expenses.
Profit Margin Formula
- Gross Profit Margin% (Gross Profit ÷ Sales Revenue x 100) measures how efficient your business is at controlling costs and generating profits. It determines whether the mark-up on your product/s or service/s are sufficient to cover all your costs and generate a profit.
- Operating Profit Margin% (Operating Profit ÷ Sales Revenue x 100) (also called return on sales) measures how efficient your business is at controlling costs and expenses in operating the business. Are the fixed costs of the business too high for the sales volume generated? If, for example, your operating profit margin is 10%, then you are only making operating earnings of 10 cents for every $1 sale. Increasing your operating profit will increase your profitability.
- Your operating profit is the same as Earnings before Interest and Tax (EBIT).
- Net Profit Margin% (Net Income after tax ÷ Sales Revenue x 100) measures the profit level after all expenses and costs have been deducted i.e. your bottom line. It shows how good your business is in turning sales into profit.
These profitability measures can be used to assess the financial health of your home based-business.
Profit = how much money your business has made for that period.
Profit mark-up = percentage mark-up on your products or services (determined by you). It is not the same as the profit margin.
Gross Profit Margin, Operating Profit Margin and the Net Profit Margin measure how profitable your business is (how much profit your business is able to generate).
You cannot alter how much profit you have made in the past, but you can use the profitability measures to measure how your business strategy is working to increase your profits in the future.
What Is A Realistic And Reasonable Profit Margin For Your Business?
Research the industry sector your business is in to determine the average profit margin for that industry sector. You can then use that as a benchmark for your business.
Getting your business profitable is the first step.
The next step is to grow profitability.
To do this, you can:
- Reduce costs by more efficient stock control, buying in bulk, negotiating with suppliers for better price, minimizing waste and errors and benchmarking (comparing) your business costs to similar businesses (are you paying too much?) to see where you can save money.
- Increase turnover by developing new product lines, finding new customers and new markets, improving customer service, running promotions, using add-ons to suggest a complementary product or service and checking if you have priced your products or services correctly (can you increase the price without losing customers? Make the product or service more valuable to your customers).
- Increase productivity with better planning and organization.
- Increase efficiency (for example, what is your most profitable product or service? Concentrate on achieving higher sales for this product or service), managing inventory or creating a customer database (it is said that 80% of sales come from 20% of your customers, therefore identify those customers and target their needs).