Four Ways To Measure Profitability And Grow Your Business
In this article, we’ll cover definitions for the following terms:
Profitability is one of the most important parameters to understand if you’re measuring your business’s financial performance. At its core, profitability refers to your business’s capacity to earn profits from its standard chain of operations. Although similar to each other, profitability and the profits that your business earns aren’t the same thing.
Think of it like this: if your business is making a profit, then the value of your business’s output is exceeding its cost of input. Profitability, on the other hand, refers to your business’s ability to earn a return on a given investment.
Profitability is, therefore, the primary goal of all business ventures. No business can survive in the long run without stable profitability.
A business that enjoys higher profitability:
- has the capacity to reward its owners with a greater return on their investment,
- is operationally efficient,
- has the capacity to meet its short-term obligations, and
- Demonstrates a public acceptance of its products and competitiveness.
There are different ways you can measure your business’s profitability. These methods include calculating profitability ratios, break-even analysis, and returns on assets and investments.
Below, we’ll discuss everything you need to know to perform a profitability analysis for your business. We’ll also cover important information on how to calculate your profitability and profitability formulas.