PROFITABILITY: THE OVERALL HEALTH OF YOUR BUSINESS
Profitability (noun): the efficiency of a company or industry at generating earnings. Profitability is
expressed in terms of several popular numbers that measure one of two generic types of performance:
"how much they make with what they've got" and "how much they make from what they take in".
First, let’s simplify the definition of “Profit” for the business owner:
Profit = Total Revenue - Total Expenses
Profitability is also the best overall indicator of the financial health of your company. Without profits,
owners typically must sacrifice their own income to make ends meet. With profitability, your business can
truly become the vehicle you need to meet your current and future financial goals, including:
1. Generating capital to reinvest in the continued growth of your business
2. Providing you with the quality lifestyle you desire for your family
3. Creating wealth
4. Establishing equity (increase the value of your business when it comes time to sell)
5. Eliminating debt
Revenue = Total Income Collected From Your Customers for Services Provided
Revenue can be calculated on a weekly, monthly or yearly basis and it is critical for you to know your
revenue numbers. Revenue is both a product of the total number of jobs you complete and, just as
important, how you price your services. As you look back over the last year, if you were not satisfied with
the overall revenue of your business, ask yourself:
1. Did I drive the highest volume of service calls to my company through my marketing efforts?
2. Do I price my services in such a way as to generate profit?
Too often, owners of service businesses establish an hourly rate based upon what their
competition is doing. In many cases, this strategy leads to an hourly rate that is insufficient to
produce a profit. Hourly rates—or flat rate pricing for that matter—must be based upon your
actual cost of doing business and achieving a healthy profit.
Expenses = Cost of Doing Business
The saying “You have to spend money to make money” is true in any business. However, when is the last
time you conducted a detailed analysis of where your money is spent on a monthly basis? An easy
exercise is to review all of your payments and credit card bills in any given month or quarter and ask
yourself the following:
1. Is this expense vital to the success of my business and does it consistently deliver the results
that I desire?
2. Is there a better supplier or employee that can deliver similar results at a lower cost?
In conclusion, consistently achieving profitability in your business helps to ensure the success and
longevity of your company. Because profitability is equally dependent on producing revenues and
controlling expenses, it is vital for any small business owner to continually evaluate how they are
performing in these two critical areas on a regular basis.