Again, it depends. If you're calculating profit to figure out your tax liability, you typically want to minimize your profit to reduce your taxes, so you'll be subtracting as many costs as possible. But if you're getting ready to sell your business, you usually want to maximize profit to increase your sale price, so you'll likely be backing out as many of the variable costs as you can to make the company look more appealing to a prospective buyer.
When it's just you and the numbers alone in your office, and you're trying to figure out whether the business is really making any money, and if so, how much, you'll probably want something in the middle. In general terms, there are at least three times during the growth of your business when you'll want to calculate your profit.
- At the start, when you're setting prices
- Each year, as you budget and make projections
- As you're planning your exit from the business
Action Steps
The best contacts and resources to help you get it done
Think profit from the start
Early in the startup process, you need to set your prices. But you need to make sure that you've built in enough of a margin (profit as a percentage of sales) to keep your business afloat. Once you do that, you should next figure out how long it will take before you've covered your startup costs and begin making a profit.I recommend: Try some worksheets from Entrepreneur.com for step-by-step guides to profitable pricing and breakeven analysis. Also, contact your local Small Business Development Center (SBDC) for free educational seminars on starting and running a profitable business. Find the SBDC near you.
Keep profit in mind as you grow
Once you're up and running, it's important to sit down regularly to make sure your company is profitable, and then make the necessary adjustments if you find that it isn't.I recommend: For a helpful profit-and-loss projection worksheet, check out Inc.com. Access to the worksheet requires free registration. You can also use software packages, such as Quicken or QuickBooks, to track profitability; download trial versions of Quicken and QuickBooks.
Make sure projects are profitable
Companies that work on a project-by-project basis — for instance, those involved in design, construction and architecture — need to ensure that each project they take on will make a profit.I recommend: For a worksheet on how to calculate project profitability, check out this article at Inc.com. Access requires free registration.
Calculate the value of your business
Often, when business owners are trying to gauge profit, it's because they need to perform a business valuation. Again, the precise definition of profit here depends on the purpose of the valuation: to sell the business, to obtain financing, to prepare for tax season, to create a succession plan, to settle a divorce, etc.I recommend: You can find information about various business-valuation methods at eBizBrokers.com and American Express. To make some rough valuation estimates on your own, check out these calculators from cdnbx.com and Dinky Town. To find a qualified business appraiser near you, try the Institute of Business Appraisers.
Tips & Tactics
Helpful advice for making the most of this Guide
- You don't necessarily need fancy spreadsheets to calculate profit: sometimes pen and paper are your best bet.
- Don't confuse profit with cash flow: just because you have cash on hand doesn't mean you're making a profit. (On the other hand, just because you're cash-flow positive doesn't mean your business is profitable, either; you need both for sustainability.)
- Be sure to give your employees an education about profitability: the more they know about how your business makes money, the better they'll be able to help you make it happen.
the Business Income Statements page at Business.com
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