Computing Business Profitability

By Susan Martin

Caught up in the day to day details of running a business, many business owners and entrepreneurs overlook an important activity: Computing business profitability. Instead, they go along, not thinking about what's happening with their business finances, until there's a cash flow problem.

Never confuse profitability with cash flow.

But cash flow is not an indication of profitability. Depending on the time of year, companies that are profitable may have smaller bank balances. And companies who are losing money may have higher ones.

Computing business profitability can help you make more money.

Don’t overlook this important tool. As long as you're keeping good accounting records doing this computation will be easy.

To compute your business profitability, just take out a sheet of paper and a pencil, and open up your accounting program or ledger sheet.

1. Jot down the cash balance in your checking and savings accounts at the beginning of the year, and compare it with your cash balance today. Show the difference with a plus or minus sign.

2. Do the same with your A/R and A/P balances, loans, machinery & equipment, and the dollar value of your inventory and goods in process, (at cost.)

3. Make four columns going across: Account, Difference (+ or -), Positive and Negative.

4. If you have larger cash, A/R, machinery & equipment, inventory or goods in process balances now than you had in the beginning period, put that difference in the positive column. If the difference is smaller, put it in the negative column.

5. If you have larger A/P or loan balances now than you had in the beginning period, put that difference in the negative column. If the difference is smaller, put it in the positive column.

6. Then, total the positive and negative columns. Subtract the negatives from the positives. If you have a positive balance, that’s your profit. A negative balance is a loss.

For example:

Cash Jan. 1 10,374 A/R Jan. 1 16,330

Jun. 1 12,769 Jun. 1 19,765

Difference: +2,395 +3,435

A/P Jan. 1 9,867 Inv. Jan. 1 23,879

Jun. 1 13,987 Jun. 1 8,612

Difference: +4120 +15,267

Account Diff. + or - Positive Negative

Cash + 2395 2395

A/R + 3435 3435

A/P + 4120 4120

Inventory +15267 15267

Totals +5830 -19387

Computing business profitability or loss: Subtract negative total from positive one. If your positive total is greater, you have a profit, if your negative is greater, you have a loss.

Positive 5830

Negative 19387

Loss (13557)

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