How to know if your business is profitable

How to know if your business is profitable

The main concern that many reader friends express to me is “how to know if my business is profitable” The “how to ensure that the business I want to start will be profitable“.

And it is not for less since nobody wants start a business that does not offer future and personal fulfillment.

And although profitability is mainly conceived as an economic return, we can also associate it with other factors of great importance.

First of all, we must be clear and agree on what profitability is. And to define it in a simple way we will say that it is: the ability of a business to produce profits that meet the expectations of the entrepreneur.

In this line of thought, and in order to reasonably answer the main question, let’s analyze the following factors related to the profitability of a business. Suppose the following example: You have the idea of ​​starting a car wash business in mind and you want know if this business is profitable.

A business can be profitable for you but not for me
If we appeal directly to the profits that are needed for a business to be considered profitable, then we have to see it based on the budget of who is planning the company.

Suppose this business can generate about $ 1000 in net profit per month minus all costs. Is that $ 1000 profitable for you? That will depend on your budget.

It may be that someone considers that $ 1000 is perfect for them to meet their basic needs and continue building the business. But on the contrary, for another person, those same $ 1000 may not represent profit and this may be due to a thousand reasons.

Then, a business is profitable for you, if the monthly profit margin it generates covers your minimum budget needs.

A business can be profitable based on the time invested
Let’s assume that the $ 1000 in the example covers your personal or family budget and that this amount of money is a good motivator to stay in business. What about the weather? Suppose that to generate these profits you need to invest 10 or 12 hours a day including Saturdays and Sundays, would it be the same feeling of profitability?

Would you consider that a business in which you invest a lot of time is profitable for you? If you are clear about the entrepreneurial vision surely you know that at the beginning you will have to invest a lot and earn “little” while building your company. But if you really are not willing to invest that kind of time and effort, surely this project for you is not profitable.

Then profitability is also measured in terms of the effort and resources that will be invested to generate economic gains.

A business can be profitable in Madrid but not in Japan
The success of a business has to do with the market, with the customers. A business model can be accepted and successful in Madrid but it is not necessarily so in Japan because the markets are different. The same principle applies to regions in the same country and even to areas in the same city.

Hence, the profitability of the business also resides in the ability to create the appropriate models for each market. Is the business you have in mind suitable for the market where you plan to work it? Have you done a basic market study to ensure that there will be customers for your business?

If we consider the example of car washing, will this business work in a place where people are very poor and barely have to pay for fuel for their cars, or will it be “more profitable” in an area where people pay without reservation to keep your flawless car?

Profitability has to do with prices
Another factor that directly affects the profitability of a business is prices and this can be “boldly” summarized in a very simple formula: profit = sales – costs

Are your prices adequate? Will your customers be able to pay for your products or services? Do you have the best costs or can you lower them even more? All these questions will help you know if you are on the right track.

Your business may be an excellent idea, but if your operating, premises, employees and advertising costs are too high, surely your prices will also go through the roof with the negative effect of less profits and … less profitability.

Profitability then, has to do with your ability to offer excellent products at excellent prices., even better than your competition.

To finish, we must mention a fundamental factor and not because it is the last one is the least important: business administration. The profitability of a business has to do with the leadership capacity, vision and self-government of the person who runs it.

In fact, many great business ideas fail for the sole reason that they are so poorly managed. Excessive expenses, luxuries, lack of controls, over-confidence, inexistence of budgets, blind aggressiveness and other serious mistakes often cause businesses to die before they were born.

So now you know, profitability is in your hands and that is why starting a business is an experience that requires an Entrepreneurial Spirit with a lot of courage and intelligence.

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