The majority of Start-Ups and SME’s have this question. How can you really know if your profitability is enough? Well, let’s start from the beginning. What is profitability?
Definition: Profitability is the amount of money that remains after you deduct from the revenue the total cost (variable costs and fixed costs). In more detail:
Now, following the definition, the amount of money that remains, is the profitability of the business (before the deduction of interest, taxes, depreciation and amortization – if the company has loaned).
After the deduction of interest, taxes, depreciation and amortization – if the company has loaned, what remains at the end is the net income (profit) after taxes. This is the amount that owners of a business can take as a profit.
Therefore, the basic question remains. Is this profitability enough? What factors determine this profitability (in order to control them) and make it enough for you?
The following list will help you find some of the most important factors that may affect your level of profits.
Please, be aware that these factors may react negatively to your business (as a combination of two or three or even more) and need adjustment and optimization. The good news is that you can control the majority of them. However, there are also others that you cannot, such as the social/economic environment, the taxation, the competition and the growth of the industry you operate in (if you do not have a substantial market share in that industry). The only way to control these factors is by deciding in the beginning if it is worth it to enter into that kind of market.
Finding the best possible balance of optimization (of the above mentioned factors), you will achieve profits that are more than enough!