Computing Business Profitability
How to calculate and analyze a business ProfitThe basic foundation and ultimate goal of most businesses are to generate profits from which businessgrowth can be realized.
Profit
generally is the making of gain in business activity for the benefit of theowners of the business. Just like the blood that circulates throughout the body, profit is vital to the existenceand expansion of a profit-seeking organization. Computing this profit is significant because it is from theresult of the computation that one is able to make important decisions in the business.
Economic Profit is different from Accounting Profit.
Economic profit is the increase in wealth that is made from an investment, taking into consideration all coststhat are linked with that investment including the opportunity cost of capital. Accounting profit is thedifference between retail sales price and the costs of acquisition (whether by harvest, extraction,manufacture, or purchase).Computing Business Profitability affects many decisions made inside the business and externally also. Howdoes business profit affect a business?
a.
Taxation – your profit will determine the amount that is paid or not paid for taxes.
b.
Business Growth – this is normally determined by how profitable a business is or its potential for profitability.
c.
Share Price – if it’s a publicly traded company then the price of the share is affected by the profit of thecompany.
d.
Financing – your profitability will help to determine the level of finance you can get for your company.
The Profit and Loss Statement
This is a financial statement that shows the revenues, costs and expenses generated during a specificperiod of time - usually a fiscal quarter or year. These records provide information that shows the ability of acompany to generate profit by increasing revenue and reducing costs. The profit and loss statement is alsocalled "statement of profit and loss", an "income statement", or an "income and expense statement".The format of the profit and loss statement is basically your revenues less your cost of business operations.That is
Sales – (Cost of Goods + operating expenses + tax expense + interest expense) = ProfitHere’s an example of an income statement:
Sales $250,000.00Cost of goods sold $100,000.00Revenues:GROSS PROFIT $150,000.00--------Expenses:ADVERTISING $ 22,967.00INSURANCE 6,765.00LEGAL & PROFESSIONAL SERVICES 725.00OFFICE EXPENSES 33,557.00OTHER BUSINESS PROPERTY 12,860.00LICENSES 5,234.00PROMOTIONAL 2,397.00BANK & CREDIT CARD FEES 2,180.00TITLES & FEES 5,854.00BOOKKEEPING 540.00--------Total Expenses $93,079.00--------NET PROFIT $ 56,921.00========
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