Profit is the motive behind any business venture. The prospect of making profit is the reason for going into and remaining in business.
What is Profit?
Profit is the difference between Income and Expenses or put in another way. It is the difference between Realization and Investment. i.e.
Profit = Income – Expenses
Or Profit = Realization – Investment
If you Realize N20,000 from a business in which you Invest N15,000, your Profit is N5,000.
Profit = N20,000 – N15,000 =N5,000
Why is Profit Important in Business?
- A business not making profit will eventually die.
- After the initial investment, profit is the source of additional capital for the business’ expansion.
- No bank will give loan to a business that is not making profit.
- Profit is the reward for entrepreneurship.
- A business not making profit will not be able to fulfil its obligations to the owners, the Govt and the community where it operates.
- Profit is the barometer for measuring the health of a business; a business not making profit is sick and need to be rescued.
- Lack of profitability is an indication of a poorly managed business.
- If you decide to sell the business, the prospective buyer will like to know the profit history of the business.
Given the Importance of profit to the business, every business owner must put in place a mechanism to determine the profit of his/her business.
How Often Should Profit Be Determined?
Profit must be determined on Monthly, Quarterly and Annually
The frequency is important so that corrective action could be taken if the profit is going down from one period to another.
What Are Profit Drivers?
Profit drivers are the key factors that have significant impact on your bottom line (Net Profit). To make your business profitable, you need to identify and understand the financial factors that affect profitability.
From the accounting equation:
Profit = Income – Expenses.
There are 2 key Profit drivers.
To improve on your profitability, you need to adopt strategies to increase your Sales Revenue (Income) as well as decrease your Costs (Expenses).
- A. Income
Income as a Profit driver can further be broken down:
Income = Price x Quantity (Volume)
To increase your Income, you have two options;
- Increase the Price of your goods (if feasible), without reducing sales.
- Increase Quantity of goods sold (Sales Volume)
Improved customer-care is a non-financial strategy to increase Sales Volume.
B Reduce Costs (Expenses)
Adopt strategies to reduce the costs associated with your business.
This can be done by reducing wastages and negotiating the cost of input.
How Do You Determine The Profitability of Your Business?
To determine what Profit your business is making, you need to:
- Keep record of your Income and Expenses
- Determine the Total of your Income and Total of your Expenses each month
- Remove Total Expenses from Total Income
- The result in step (3) is your Profit or Loss for the month
- Repeat the steps every month
- Compare the result from month-to-month to see trend
Most business-owners find it difficult to carry out the steps above, because:
- It is time-consuming
- They do not have the required professional skills
- They lack the fund to outsource or hire professional Accountant or Bookkeeper
Fortunately, technology can simplify the process of Record keeping and Profit calculation.
Cloud Bookkeeping & Accounting Technology
With this technology, the whole process of Record keeping and Profit calculation is automated.
In addition, it helps you to:
- Generate other reports required by banks for loan processing
- Provide information to enable you manage your business’ finances more efficiently
This will give you control over the running of your business.
This technology can benefit both primary producers and businesses in the value-chain
Being Cloud-based, the costs associated with acquisition and operations are minimal:
- No need to acquire expensive computer hardware-one Laptop is the basic hardware requirement
- No need for computer software-pay monthly subscription for its use.
- Very easy to use-no specialized training
One of the reasons why many business owners cannot attract funding from Bank and Govt. is because they cannot provide verifiable record that their business is profitable and capable of repayment.
With this technology, they will be able to overcome this challenge.
For further information and demonstration of this wonderful technology, please contact: