One of the questions I always ask my Administration students is what is the main objective of any business? Although the answers are usually varied, in general, there is someone who says that they are sales. At first glance that would seem to be the reason for the existence of a business, to sell more and more, but in reality, the objective is generate profit, or put in other words, generate profits. Although, of course, sales are the fuel that allows you to generate these profits, know if your business generates profits It is the first step in determining the efficiency (and success) of your business.
In order to know if your business generates profits it is necessary to strictly record the income and costs it generates. Only in this way can you get an accurate picture of the productivity of your investment.
Profits are, in the end, what will allow the business to survive, grow and be successful; without profit there is no present or future. Therefore, knowing if our business is generating sufficient profits is one of the first responsibilities of every entrepreneur and businessman.
What are profits?
In short, profits are the profit obtained from an investment, that is, the earnings I generate after my investments. Therefore, to make a profit, I must invest; And to know the level of my profits, I must know how much it costs me to generate those profits.
When all the information is available (income and costs) necessary, knowing if your business generates profits is very simple; It is equivalent to performing a simple calculation to determine profits:
Utilities =Income -Costs
With this simple formula we will be in a position to know if we are generating profits in our business.
However, this is a very generic way of know if your business generates profits. Sometimes it is necessary to know the profits in different phases of the business, that is, to know the different types of profits (or profits) that your business generates.
Basically we can talk about two main types of profits, the two types that you should know to know how your business is making profits: Gross profit Y net profit.
Calculation of profits
Accounting, the calculation of profit requires calculating net sales1, gross profit, operating profit, profit before taxes and net profit. However, we will simplify the process to make it easy to understand and apply.2.
Gross profit
The Gross profit is the difference between the sales (or revenue) of the business minus the costs to generate those sales. It is the profit obtained before paying taxes and discounting other indirect costs. This means that to obtain the gross profit, to your total income derived from your sales, you must deduct the costs that you incurred to generate those sales (only direct costs).
Gross profit=Net sales -Sales cost
For example, if your income for the month was $100,000, and to achieve that income you spent $60,000 (including salaries, supplies, and costs directly related to your sales), then your gross profit would be calculated:
Gross profit=100,000-60,000=40,000
Therefore, your gross profit would be $40,000.
Net profit
The net profit It is the profit obtained after all costs have been deducted from income; and with all costs I mean everyone the costs your business incurs during its operation. These costs include indirect costs3, the payment of taxes and other expenses.
Net profit=Gross profit -Fixed and variable costs
For example, suppose that the costs of services, payment of taxes and other expenses total $15,000. Then your net profit would be calculated:
Net profit=40,000-15,000=25,000
This means that during the period you made a profit of $25,000, in such a way that, returning to the beginning of this article (Utilities =Income -Costs), after performing the calculations you would know that your business is really generating profits.
With this information in hand, you could make decisions to maintain or improve your current operations; it all depends on your goals.
Of course the simply knowing the profits does not tell us if our business is truly profitable, nor does it talk about the capacity or efficiency it has to generate profits through sales. In future articles I will write about the profit margin and profitability of a business.
FOUNTAIN: https://www.administrabien.com/como-saber-si-tu-negocio-genera-ganancias/
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