A business goes well when you know that you have money to pay your debts and you also make a profit. But also You can tell if a business is good by calculating the profitability of the business. Do you know what we are referring to?
If you have never heard this term before, or you have but you don't really know what it refers to or how it would be done, below we will help you understand it one hundred percent. Shall we start?
What is the profitability of a business
Before learning how to calculate the profitability of a business, it is important to know what this term refers to. And specifically we talk about the ability of a company to make profits. Or benefits, whatever you want to call it.
To do this, what you do is see What relationship is there between the profit that has been obtained and the investment that has been made?. To make it easy for you to understand, let's give you an example: imagine that you have a business and that you have invested 3000 euros in it. With that money you have bought products that you are now going to sell.
After a while you run out of products and have made a profit of 10000 euros. Well, since you invested 3000 euros, you would have to subtract it, because it is the money you get back, and your profits would be 7000 euros. This would be a good business return.
Now, let's give the opposite example. You invest 3000 euros but the sale of the products only brings you 2000. In this case, you would be losing a thousand euros because you do not recover them.
Of course, The profitability of a business is much more complex than the examples that we have given you, but it is a way to understand it to move on to the next step.
Profitability of a business vs profits of a business
And we have told you before that the profitability of a business is the ability to make profits. But they really are not the same concepts. While profitability is relative, profit is not, It is absolute because it is determined by a specific number.
In reality, profitability measures how effective a business is, not how much it earns or fails to earn. Do you undesrstand now?
How to calculate the profitability of a business
Now, do you want to know if your business is profitable? The formula to calculate the profitability of a business is easy:
Profitability index (IR) = net profits (Bn) / Initial investment (Ii)
But what values ​​are each? You will see:
Los net benefits you have to get them with another formula, which is the following:
Net benefits = Project income or benefits (estimated) – associated costs.
Or what is the same, benefits minus costs.
For its part, The initial investment does not need any formula to calculate it because this is the amount of money you have to invest to carry out the project.
With this data in hand, applying the formula is simple, but what about its result? In this case, when the profitability index is greater than one, it is said that the benefits are exceeding the costs and that indicates that the business is profitable. On the other hand, when it is less than one, it implies that the expenses you have are greater than the benefits and the project may either not be very profitable, or not profitable at all.
How to increase the profitability of a business
Regardless of whether your profitability is positive or negative, every business wants to have high profitability. And this is not achieved only with investment and the recovery of profits or profits. There are ways to improve the project and influence, to a certain extent, profitability.
To increase it, there is several aspects that can be addressed in a business. For example:
Improve logistics and customer service
When you have a business facing customers (physical or online), the fact that they receive the merchandise as soon as possible, and that you are also aware of the problems that may occur to solve them, will always make the business go better.
Because If you care about serving customers quickly and appropriately, they will return. to the company when they need something.
Reduce expenses
Another point to increase profitability is to try to reduce costs, that is, Try to achieve the same but with a lower expense.
For example, instead of buying computers for a thousand euros each, buy them for half because they are second-hand. Or instead of buying raw materials from one of the most expensive suppliers, do it in another, or in another country as long as quality does not suffer (which can harm other sectors).
Increase prices
Another way to increase the profitability of a business is by raising prices. But be careful, because you play with a double edged sword. If you raise prices, customers may be dissatisfied and look to the competition for a solution so they don't have to pay so much.
Only if additional features are added to the product, or a greater benefit can the increase be justified. Otherwise, unless customers are loyal, increases will always be dangerous in any business (except those that are unique because they have no competition).
Create new products and/or services
The problem with this is that it means investing more money, and when a business is not profitable, It poses a risk when looking for an alternative to innovate. Even so, it is another solution that, carried out efficiently and with prior analysis, can help increase profitability.
train employees
More efficient, better trained and more motivated workers always help to get the job done better.
When workers are happy and feel appreciated, they work harder and better, and that has an impact on products and services. And from there to customer service.
Test new markets
Finally, another way to increase the profitability of a business is look for new clients, new sectors, niches... Again it can be risky, but sometimes not opening up to these new opportunities does not generate profitability, but rather stagnation.
Now that you know how to calculate the profitability of a business, do you have any questions about this topic? Leave them in comments.