Hi, everyone, I'm Seth David from the world famous Nerd Enterprises, Inc.
and QuickBooks has asked me to do a video on my favorite topic,
which is profitability and positive cash flow, a.k.a.
money in the bank.
In this video, we'll be sharing tips on how to measure profitability.
You may know me from my YouTube channel
where I train growing businesses like yours in accounting and process
and workflow design to run and grow your business.
Before I forget, give this video a thumbs up,
especially if you like what you see and make sure you subscribe,
because we have lots more videos like this on our YouTube channel,
and you don't want to miss something really good.
Evaluating your bottom line goes way beyond
just seeing how much money you have in the bank.
It requires an accurate analysis of your business activities
to gain insights into how profitable your business actually is.
In fact, a profitable business can still go under if cash flow is not good.
So we need to have a close look at both profits and cash flow.
It's a cruel world.
And if you'd like to read up on profitability,
check the links in the description below.
What is profitability
as a business owner,
if your revenues are sufficient to cover all of your cost of goods sold
and then all of your expenses, your business is profitable.
Profits plus positive cash flow, keep your business in operation,
but you have to see the whole picture.
There are key metrics we can look at in your business that will help identify
what areas are working well and where your business needs improvement.
The best way to determine whether your business is profitable
is by looking at margin ratios or profitability ratios.
A lot of my clients will ask me in terms of these ratios,
whether they should compare themselves to other companies in their industry.
And my answer is generally no.
I prefer to have a company look at themselves compared to
themselves yesterday versus today versus how we want to do in the future.
Margin ratios are a much better predictor of a company's
long term growth than mere dollar figures.
Here are three ratios
which can help you analyze the financial health of your business.
The first ratio I want to look at is called the gross profit margin ratio.
This ratio lets you hone in on your product profitability.
It looks at the gross profit after deducting direct
materials, direct labor, inventory costs and product overhead.
If your gross profit margin is high, that means you get to keep
a lot of your profit relative to the cost of your products.
The formula calculate gross profit is simple.
It's gross profit divided by sales.
Make sure you don't get this confused with markup,
which is the opposite, which is sales divided by gross profit.
The second ratio I want to talk about is called the operating profit margin ratio.
This ratio gives you a good look at current earning power
and how efficient your business is.
The operating profit
margin shows your business's ability to turn sales into pretax profits.
The formula to calculate the operating profit
margin is operating income, divided by sales,
then multiplied by one hundred to turn that into a percentage.
The next ratio I want to look at is your net profit margin ratio.
Sometimes this is just called the profit margin.
It's the big picture view of your profitability.
Net profit margin is similar operating profit margin, except in accounts
for earnings after taxes.
It shows you what you can extract from profits after sales.
The formula to calculate net profit margin is net income,
divided by sales, multiplied by a hundred to turn it into a percentage.
Your break even point is the point at which your sales equal your expenses,
in other words, it tells you exactly
how much money you need
to bring in at a minimum so that you're not losing any money.
In other words, if it costs you one hundred thousand dollars
to run your business,
you need to bring in a hundred thousand dollars just to break even.
You can also take a little closer look at things within your business
by looking at break even analysis for a specific segment
of the business so that you can see how that segment needs to do.
The formula for calculating break even is very simple.
It's your fixed expenses plus your variable expenses.
The formula for calculating break even against units is
follow with me here.
Fixed expenses divided by.
And then in parentheses, unit sales price minus unit variable expenses.
Remember the order of operations?
We'll put it up here for you.
The last two measures of profitability
that you can get from your financial statements are ROA, which stands
for return on assets and ROI, which stands for return on investment.
Your ROA or return on assets shows you the measure of your income
compared to the assets used in your business.
You can use this ratio to compare yourself to other companies in your industry
to see how efficient you're performing compared to others.
The higher the ROA, the more efficient your business.
The formula to calculate your ROA or return on assets
is net income before taxes divided by total assets,
and then multiply that by 100 to get it into a percentage.
Our ROI or return on investment measures, the income in comparison
to the amount of money you've invested into the company,
you want to be able to see if you're putting your money in the right places.
In short, this answers the question, is this all worth it?
The formula to calculate ROI is actually very simple.
It's your net profit before taxes divided by the total equity.
There are lots of factors that go into a business's profitability.
If you're looking for ways to increase your business's profitability.
Here are a couple of ways you can improve your bottom line.
You can look for ways to improve your efficiency and productivity
by streamlining processes and managing costs, grow sales and revenue.
If you're looking for ways
to improve your profitability, you can start by increasing your revenues.
And you can do that by seeing which products are the most profitable
and who are your best customers.
Making these connections can help you improve your pricing strategies,
increasing the top line, which flows straight through to the bottom line.
A little while back, I had a client hire me
to help them with some customer reporting they needed to do.
I wasn't really clear on what their goal was
until I started getting into designing the reports.
And it became very clear
and it was also very clear how smart it was, what they were doing.
And it was simply this.
They wanted me to identify their top customers
in terms of sales and their most profitable products.
Then from there, they were able to pull out
which of those top customers hadn't bought the top products.
And now they could start cross-selling this dramatically improve their sales
in a very short time.
If you're looking for more ways to increase efficiency and grow sales
and you love to read.
Check out the link to our article below.
If you're ready to learn more about the performance of your business,
customizable reports in
Quickbooks online advanced can give you more insights at a glance.
Analyze your profitability, cash flow and other key performance
indicators with monthly tracking tools and custom dashboards.
Now that you're equipped with all these tips on how to calculate profitability,
let's go make some money.
We have lots more videos on how to run and grow your business.
So make sure you subscribe to our QuickBooks channel
and bang that like button below if you like what you saw.
I'll see you in the next video.