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How to Determine Profitability

Profit margin is one of the most important aspects of a business to examine, both before entering into a business venture and throughout the business operation. Calculating profitability is an accurate way to determine the success of your business. Read the steps listed below and learn about how to determine your company's profitability.

  1. Calculate your company's revenue. Depending on your business, the money you earn may arrive in your business account through different methods, including cash register sales, monthly payments or increases in the stock market [source: Seid]. However you receive money, keep records of all the transactions. It's a good idea to calculate the figures every month to arrive at your monthly revenue.
  2. Calculate your company's expenses. There are many costs that can be factored into your company's expenses. These include labor, rent, equipment, taxes, and if you're selling goods, the goods themselves. These costs are often referred to as overhead costs. Remember to carefully calculate all the money you pay out each month in order to run your business, so that you can arrive at an accurate profitability amount [source: Sullivan].
  3. Subtract the costs from the revenue. By subtracting the amount you spend from the amount of money that comes in, you will arrive at your company's profit. If you're the sole business owner, this is your net profit. If you're a business partner, you must divide the profit by the number of partners.

Remember that it's best to calculate your company's profitability each month. This will allow you to determine what months are more successful than others. Also, if you have made changes in your company, determining the profitability before and after the changes were made enables you to assess whether your changes were worthwhile.