Making a profit – video transcript
In this Making a profit video, an example situation is used to demonstrate how to calculate profit.
Having a profitable business should be your number one goal as a business owner.
There are many factors that will make your business profitable and understanding these can take time.
Before you can make a profit it's important to understand what profit is.
The money that comes into your business is called revenue. You use this to pay your business expenses and running costs. Once these are paid, what is left over is your profit.
If your profit is a positive number, congratulations, you're making a profit!
If your profit is a negative number, you're making a loss and if it's zero, you're only making enough money to break-even.
Break-even is when your revenue matches your operating expenses and cost of goods or services sold.
Remember, your operating expenses should include the wages or drawings you pay yourself as a business owner.
Let's use Brett's Bakery as an example.
If Brett's business has an income of $100,000 and expenses of $60,000, Brett's making a profit of $40,000.
Brett can now work out his profit margins to determine the overall health of his business.
A gross profit margin shows if the total amount you bring in from sales (called your sales revenue) covers your cost of goods sold, leaving your business with a gross profit.
If Brett has a revenue of $100,000 and a profit of $40,000, then his gross profit margin is 40%.
This is calculated by dividing $40,000 by $100,000.
Now that you understand profit, let's look at a couple of easy steps on how to increase your revenue and decrease your expenses.
Firstly you should have a sales and pricing strategy that focuses on your most profitable products and your most profitable customers.
Every week Brett's customer Lucy buys 25 loaves of bread and 80 cupcakes, spending $400 at his bakery. This makes her a profitable customer.
Now you should reduce your expenses by looking at your fixed and variable costs (also known as operating expenses and cost of goods sold) and finding ways to reduce these.
It can help to calculate the percentage of revenue you spend on each of your expenses.
Brett thinks he might be paying too much for some of his ingredients. He contacts his supplier and negotiates a cheaper price for the flour he buys.
As you work towards making your business more profitable, it's important to monitor changes and track improvements.
A budget is a great way to monitor your expenses, set realistic profit goals, use profit margins to track progress and compare month on month.
If you're unsure how to prepare a budget seek further advice.
For more help on making a profit, talk to your accountant or financial adviser, or visit the Business Queensland website.
Watch the Making a profit video.
- Last reviewed: 20 Dec 2021
- Last updated: 20 Dec 2021