Profit and how to increase



What is Profit?
Profit is the surplus income your business is left with after the payment of all expenses. It is business revenue that remains after the payment of costs of the business. It is the net income you are left with after everything has been paid for. Remember that you go into business with the goal of making a profit. You do not go into business just for the fun of it. That is a hobby.

If the objective in your business is not to generate profits, then it is not a true business.

 


Are you Making a Profit?
Making a profit is the most important objective of any business. Profit is simply defined as revenues less expenses. To increase profits you must either raise revenues or lower expenses, or preferably both.

Some of the things you will need to consider include:

  • Analyse your revenue and expenses.
  • Look at your financial ratios.
  • Check the mix in amount of profit.
  • Look at the trends.
  • Check that your records are okay.
  • What about your stocks?

 

  1. Analyse your revenues and expenses.
    Profit equals revenue less all your expenses. Therefore, to work out what your correct profit is you need to work out what your revenues are, as well as what your expenses are, and then offset them.

  2. Calculate financial ratios.
    A ratio is simply expressing how one item relates to another. It helps you to work out the results or the performance of various areas in your business. For example, the current ratio simply is a measure of your cash position or just how easily your assets can be converted to cash. It is made up of the current assets of your business, divided by its current liabilities. It tells you whether you have enough resources on hand to pay your bills when they fall due.

    Another ratio is the average collection period for the money owing to your business. You arrive at this by dividing the amounts due to your business (debtors), by the daily credit sales figure. The ratio tells you the length of time it takes for you to get your cash in after the sale has been made. Obviously, the shorter the period, then the quicker the cash will flow in and the stronger your cash position will be at any time. There are many other ratios, which are covered under a separate area.

  3. Do you have enough profit?
    You need to generate enough profit in the business to meet all your requirements, which are not only bills, but also the wages and salaries of employees. The objective of being in business is to make a profit, and also to grow the business so you can make an even greater profit.

    You need to know whether there is sufficient profit being earned by your business, and also whether the current profits tie in with the profit you should have made, according to your original business plan. You also need to check how the profits you are currently making stack up against the profits you made in past years. You may have to check your profitability against profits made by other firms in your industry.

    That is, you may need to benchmark your performance against your peers because this is a good indication of whether you are performing according to the market level, or whether you are in front of, or behind that level.

  4. How your profits are tracking.
    You need to analyse the direction your profits are moving. This involves following the trends by using the indicators of the ratios (as already explained). The comparison with other firms in the industry through benchmarking will also assist you in tracking the direction of your business and its profitability.

  5. Adequate records.
    You need to have in place adequate records to record the transactions of your business, which will include its income as well as expenses. Obviously to arrive at the correct profit, proper and accurate records are the only way to obtain the necessary data to assess how you are going. You have to make sure that you have full and adequate accounting and bookkeeping records in place, so the necessary financial information can be extracted to enable you to determine profitability at any time.

  6. Look at your stocks.
    The amount of stock you have in storage can affect your profitability. In the financial accounts the value of the stock will determine the profit as per the books, but profit, as already indicated, is not necessarily cash in the bank, so the level of stock you hold is important when looking at how profitably you are conducting the operation.

    The business can incur substantial costs if it holds excess stocks when those stocks should be converted into sales, which in turn become cash in the bank. The important thing here is to ensure you have good records of your stocks so that decisions can be made if it appears that your liquidity requires stocks to be moved quickly.