"Profit" is one of the most malleable and amorphous terms in business. Exactly what the word means can vary according to the purpose for which you're asking the question. Generally speaking, profit refers to the amount of money left over after you've subtracted your costs from your revenues. But what exactly do those "costs" entail?
Again, it depends. If you're calculating profit to figure out your tax liability, you typically want to minimize your profit to reduce your taxes, so you'll be subtracting as many costs as possible. But if you're getting ready to sell your business, you usually want to maximize profit to increase your sale price, so you'll likely be backing out as many of the variable costs as you can to make the company look more appealing to a prospective buyer.
When it's just you and the numbers alone in your office, and you're trying to figure out whether the business is really making any money, and if so, how much, you'll probably want something in the middle. In general terms, there are at least three times during the growth of your business when you'll want to calculate your profit.
The best contacts and resources to help you get it done
Think profit from the start
Early in the startup process, you need to set your prices. But you need to make sure that you've built in enough of a margin (profit as a percentage of sales) to keep your business afloat. Once you do that, you should next figure out how long it will take before you've covered your startup costs and begin making a profit.
I recommend: Try some worksheets from Entrepreneur.com for step-by-step guides to
profitable pricing and
breakeven analysis. Also, contact your local Small Business Development Center (SBDC) for free educational seminars on starting and running a profitable business. Find the
SBDC near you.
Keep profit in mind as you grow
Once you're up and running, it's important to sit down regularly to make sure your company is profitable, and then make the necessary adjustments if you find that it isn't.
I recommend: For a helpful profit-and-loss projection worksheet, check out
Inc.com. Access to the worksheet requires free registration. You can also use software packages, such as Quicken or QuickBooks, to track profitability; download trial versions of
Quicken and
QuickBooks.
Make sure projects are profitable
Companies that work on a project-by-project basis — for instance, those involved in design, construction and architecture — need to ensure that each project they take on will make a profit.
I recommend: For a worksheet on how to calculate
project profitability, check out this article at Inc.com. Access requires free registration.
Calculate the value of your business
Often, when business owners are trying to gauge profit, it's because they need to perform a business valuation. Again, the precise definition of profit here depends on the purpose of the valuation: to sell the business, to obtain financing, to prepare for tax season, to create a succession plan, to settle a divorce, etc.
I recommend: You can find information about various business-valuation methods at
eBizBrokers.com and
American Express. To make some rough valuation estimates on your own, check out these calculators from
cdnbx.com and
Dinky Town. To find a qualified business appraiser near you, try the
Institute of Business Appraisers.
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