What are profitable businesses and how do you know if the business you just started or have been operating is profitable?
It is expected of you to believe that the business you are about to start is going to be profitable based on your projections and assumptions, but you need to be sure that your assumptions are right before you get yourself trapped in a huge loss.
In this article, I will do my best to simplify and do justice to how you can easily track if your business is profitable so that you can know what to do and how to scale that business. I will avoid the use of technical terms and accounting vocabulary to make the explanation easier to understand.
Wrong profitability assumptions
I will like to start with the misconception that many business owners have about profitability. Below are some of the wrong assumptions many businesses make.
More customers mean more profit
Not every time more customers mean more profit, you might have a lot of customers that are buying your product at the wrong price which will make you lose more money simply because you don’t know how to price your product.
Many small businesses are selling what is meant to be sold at $10 per unit to customers at $9 per unit, imagine the business sold to 100 customers in a month, that is sales of $900 instead of $1,000.
Fast sales mean more profit (a.k.a sold out)
So, you just stock your inventory with products that are worth $10,000 to acquire. Yes, it costs you $10,000 to order the product wholesale and after selling everything, you have $12,500 with the joy that your profit will be $2,500.
Luckily, you sold them all in one month, but you have forgotten that it costs you $1,000 to ship the goods, process and clear them before reaching your store. You also spent another $1,000 on social media ads and Instagram influencer marketing for quick sales that month.
Remember that your rent for that month costs $100, tax on your sales is $750 and your employees’ salary, utility bills, plus other miscellaneous expenses cost you an additional $1,000. That is a whopping $3,850 on $2,500 made from the quick sales.
You can see that your expense has already cancelled out your proclaimed profit.
Getting loan can guarantee profit
Let us look at the example above on “Sales do not mean more profit”. Imagine that you got a twelve months tenure loan of $15,000 with the expectation to repay $1,400 monthly. This means that your loan will always be reducing your profit by $1,400 every month. This will be a big blow to the $2,500 that you claimed to be your profit, not to talk of the $3,850 expenses.
When is your business profitable?
Your business will be profitable when the amount of money you are spending to run your business does not affect the income from your business. If it costs you $10,000 to get your products (cost of goods sold) and you sold everything at $15,000 (revenue), you need to understand that your income is $5,000 and not your profit. Before you can conclude on profit, you must sum up all your spending e.g. $2,500 (expenses) and subtract it from your income to arrive at your profit of $2,500.
A simple breakdown of profit calculation
(A) Cost of goods that you are selling (e.g production or acquisition) = $10,000
(B) Amount you sold all the goods = $15,000
(C) Your income (not profit) = $5,000 i.e B minus A
(D) Your spending (expenses plus tax) = $2,500
(E) Your profit (real earning) = $2,500 i.e C minus D
The mistake that many small business owners make is taking (C) as their profit!
How to automatically track your profit periodically
It is a big problem if you do not have a way to easily identify when your sales are not profitable in real-time. The only solution that I can recommend is to use simple automated bookkeeping and accounting software like Tyms Book, which has been designed with small business owners in mind. It is available on Android, iPhone and web applications. You can even give access to your team members or employee if necessary.
The first thing you need to do as a new user on Tyms is to visit https://mybook.tyms.africa/auth/register to create an account or visit https://tyms.page.link/book to open it directly on your mobile app.
Start by ensuring that you are recording the money that enters your business through sales and also the money that leaves your business due to spending. These are called money in or inflow and money out or outflow on the platform.
Also, when adding an item while keeping a sales record on Tyms Book, always endeavour to provide your cost price (the amount it costs to get the product) and selling price (the amount at which it is sold to customers). This makes it easy for Tyms Book to come up with what your cost of goods sold will look like. Last, always provide the shipping fee where necessary.
Tyms Book will always show you your income, profit, loss and total sales every time you access the app. In addition, at the beginning of every new week and new month, Tyms Book will always send you your business profit and loss statement via email, so that you can easily plan and take action before it is too late.
Visit the comment section below to leave your comments or questions on Tyms Book, and I will be happy to answer.