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A company is said to be profitable if its income is greater than its expenses. This is therefore a crucial element for any entrepreneur since profitability allows you to generate sums that you can actually use.
Without being exhaustive, this article shows you key elements to ensure the profitability of your business.
How do I know when my business will be profitable?
Before even launching your business or a new product, it is wise, for the sake of forecasting, to determine the moment from which your business will become profitable. This is essential even before improving your profitability, which you can do for example by acting on thecost price.
There are indicators to calculate when your business becomes profitable.
THEbreak evenis precisely one of these indicators. It allows you to calculate the amount from which your income coversyour charges.
How to calculate it? You must use:
Fixed charges: these are the costs that the company must incur regardless of its level of activity. This includes, for example, rent or equipment maintenance.
The margin on variable costs: this is the excess of turnover over variable costs.
The margin rate on variable costs: this is the percentage of profit or loss for a product or service based on the cost of purchase or production.
The formula is as follows:
Profitability threshold = fixed costs /margin rateon variable costs
To obtain the variable cost margin rate, the operation to be carried out is as follows:
variable cost margin rate = (variable cost margin / turnover) * 100
Finally, the margin on variable cost is obtained as follows: margin on variable cost = turnover — variable costs
How to interpret it?
The higher the break-even point, the less judicious it is to embark on the planned project. It is an indicator that actually allows you to measure the economic viability of your project.
This break-even point allows you to calculate a value, an amount. It is interesting to combine it with the break-even point which allows you to calculate in number of days the moment when you become profitabe.
The break-even point is calculated as follows:
Break-even point = (break-even point / turnover) * 365 days
Turnover : this is the amount of business carried out by the company as part of its activity. It is obtained by adding the sales amounts during the financial year.
Fixed charges .
Variable costs : these are costs that vary depending on the company’s activity. These include employee salaries, subcontracting costs, and transportation costs.
The calculation of profitability is broken down as follows:
Profitability of your business: turnover — fixed costs — variable costs.
If the result is negative, then the business is not profitable. If this result is 0, then your business is profitable, but you are not making any profit. If the result is positive, your business is profitable and you generate funds that you can freely use.
How to improve the profitability of a company?
One of the ways to improve the profitability of a company is to act on the cost price.
Cost of ownership is the cost that must be incurred to make a product or service ready for sale. It is the price you must pay to produce one unit that you sell.
One of the ways to act on this variable to reduce it is to update the production process. To do this, we must remain vigilant regarding technical developments in the market. For example, perhaps an innovation in your field applied to your production process would reduce the cost price.
Another solution can also be to rationalize its production process. Following an in-depth analysis of this process, you may be able to detect flaws or phases of the process that can be improved. For example, maybe the communication between two teams is not effective enough. Solving this problem would reduce production