How to Measure the Profitability of a Company

by Clayton Browne ; Updated July 27, 2017

Businesses exist to make a profit. That is, to sell products and/or services to the public at a price higher than what the business owner paid for them (i.e., make a profit). How much higher is up to the individual businessperson from what the market will bear to a "fair profit" in his mind. An important factor in running a business is to try and keep your business expenses (everything from cost of goods to rent to bills to insurance to paying employees) low so you can charge a lower price for your products/services and still make a profit. Businesses calculate profitability in several ways, but the bottom line is net profits (profits after all expenses).

Calculating Monthly Net Profit

Step 1

Add up your total business sales for the month (excluding sales taxes collected and remanded to the government).

Step 2

Subtract the total cost of goods sold from the total business sales for the month to calculate your gross profit.

Step 3

Total up all operating expenses for the month, including rent, utilities, insurance and employee pay and benefit costs.

Step 4

Subtract the total monthly operating expenses calculated in Step 3 from your gross profit calculated in Step 2 to calculate your net profit. Net profit is defined by some sources as the amount remaining after taxes are also deducted, but that really only applies to larger businesses that pay corporate taxes. Most businesses are small businesses whose profits are simply income to the business owner and are taxed on that basis.

Tips

  • Taking your net profit figure and looking at it as a percentage or a ratio (gross or net profit margins, for example) is often the most useful way to get a grip on profitability.

About the Author

Clayton Browne has been writing professionally since 1994. He has written and edited everything from science fiction to semiconductor patents to dissertations in linguistics, having worked for Holt, Rinehart & Winston, Steck-Vaughn and The Psychological Corp. Browne has a Master of Science in linguistic anthropology from the University of Wisconsin-Milwaukee.

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