Hey There, thank you for stopping by. We finally made it to March. I am so excited that spring will be here in just a few more weeks. Over the last couple of weeks, we have taken the time to review our revenue and expenses today we are going to pull those two concepts together and talk about profit.
How did you do?
Profit is seeking to answer the basic question of ‘how did your business do?’ When you are running a business, you want to understand this so that you can assess the health of your company. Are you making money or losing money? In other words, does it cost you more money to run your business than your make from running your business? Every business owner/manager should understand the health of their organization.
I find that accounting/finance people often make financial terms sound scary. It does not have to be. Today we will look at profit and see it is just a basic concept and equation. To put it simply profit equals revenue minus your expense. If your revenue exceeds your expenses, you have a profit. If your expenses exceed your revenue, you have a loss.
Profit = Revenue – Expense
How Often do you check your profit?
Your business should have a set schedule for when your review and analyze your data. Depending on the size and type of business will depend on how often and how large your review periods are. It is important to be consistent so that you can compare your data across different time periods.
For example, if you want to review your data often you may set your period to be one calendar month, meaning each month, you review your revenue, expenses, and profit. Monthly you will pull together the data for your revenue, expenses, and profit.
Some companies will make their period quarterly, or yearly, I prefer a monthly schedule. Regardless of how often you review all the data, you should always keep up with your bookkeeping and records. It is much easier to input a month’s worth of data than a year. Not to mention the risk of losing data increases over time.
Why is Profit important?
Profit is important because it provides a basic sense of how your company is doing. There are many ratios and equations that accountants or analysts will use to tell you about your business. Profit is just one of many tools, it is easily calculated and gives you a basic status on the company.
What is the next step?
Once you know if you are making or losing money you can use this information to continue to grow your business. If you are making a profit, you know that you are moving in the right direction. Your expenses are lower than your revenue. You can dig into your sales and expenses and look for opportunities to continue to grow.
If you find that you are losing money, you can take this opportunity to find ways to improve your business strategy and increase your profit. At this point, you should be tracking both revenue and expenses details regularly. This data will be your starting point to discover where there are opportunities. Can you cut costs? Are there areas of revenue that are currently underachieving? By cutting costs, increasing revenue, or tackling both your profit will begin to increase.
Profit is not one size fits all
Profit and loss will happen to your business at different times throughout the life of your business. Depending on your business and industry there may be certain times of the year where you will make a profit or a loss. The life cycle of your business will also impact your numbers. If your business is just starting out you are more likely to have a loss than a company that is in a steady state of operations.
It is very important to understand your numbers in context to the greater picture. Profit is not the only way to understand your business. Using the profit detail along with other financial analysis tools will provide you a better view of your business. You should understand the full picture before determining the health of your company and potential strategies.
If your business needs help setting up, tracking or determining your profit, give us at Finergy Inc. a call. We can help you establish and maintain a process.
Have A Great Weekend!
*We hope you enjoyed our blog. Please note that the intent of this blog is to provide general information and should not be construed as financial, financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services. Always seek the help of a professional if you have questions/concerns about maintaining your financials.